Karoon launches share buyback, new capital returns plan – But it's not enough to woo investors

Karoon Energy (ASX: KAR) has been one of the more intriguing deep value plays on the ASX 200, with Macquarie analysts expecting the company to harvest its market cap in free cash flow over the next four years.

Despite boasting a strong forward-looking earnings profile, the stock is down 10% year-to-date while oil prices have managed to tick 4% higher. This weakness stems from market concerns about further M&A activity and a perceived lack of focus on returning capital to shareholders through dividends or buybacks.

Today, Karoon finally delivered the news that shareholders have been eagerly anticipating.

Dividends and buybacks

Karoon announced a revised capital allocation framework, which includes the following:

• Investing in, and maximising value from existing assets

• Pursuing growth opportunities that meet strict investment criteria and achieve material value accretion for shareholders

• Delivering annual capital returns to shareholders of 20-40% of underlying net profit after tax via cash dividends and/or share buybacks

• Consideration of additional shareholder returns during periods of elevated oil prices

The company expects to pay a dividend post-August reporting season and undertake a US$25 million on-market share buyback.

"The Board considers that the Company’s current share price is not reflective of the significant value that has been created over the past four years," said Chairman Peter Botten.

Mixed reaction

Karoon shares rallied 4.7% as the market opened on Thursday but quickly faded back towards breakeven. The stock is trading just 0.8% higher at noon.

In May, Macquarie's base case scenario for Karoon was a dividend payout ratio of approximately 30% moving forward. The midpoint of today's dividend reveal is right on Macquarie's forecasts. The price action suggests that the announcement created a liquidity event for investors to exit rather than enter.

Nevertheless, Macquarie says a 30% payout ratio leaves adequate cash and cash flow to fund the development of the company's Neon oil field.

"We believe this [30% payout ratio] strikes a balance between rewarding investors (5-6% yield) and reinvesting in growth," the analysts said.

Source: Macquarie Research May 2024

See it to believe it

In some ways, it was a 'no surprises' capital allocation framework announcement as the numbers largely align with Macquarie's expectations. The analysts have an Outperform rating on the stock with a $2.50 target price, with the view that a dividend payout could support a re-rating.

Karoon is expected to report its half-year FY24 result on Wednesday, 28 August. Macquarie expects the company to report the following numbers:

• Total revenue of US$342 million

• EBITDA of US$217 million

• Adjusted profit of US$96 million

• EPS of 12 US cents

• Interim dividend of 3 cents per share (for the full-year they expect 7 cents)

It's also worth noting that Karoon has a few shorters on the register, with 3.00% of its shares currently shorted.