Karoon was one of the ASX's cheapest stocks. Here's what went wrong

Just 12 to 24 months ago, Karoon Energy (KAR) was often hailed as one of the market's cheapest stocks, with some truly insane free cash flows to look forward to.

Fast forward to today, and it's cut production guidance twice in four months and, in hindsight, massively overpaid for the Who Dat assets in the Gulf of Mexico in December 2023.

Brent has rallied 70% year-to-date to US$102 a barrel, lifting the S&P/ASX 200 Energy Index 28%. Karoon is trading just above breakeven for the year.

Here's a recap of what could have been and what's gone wrong.

The Who Dat acquisition

Karoon paid US$720 million for a 30% interest in Who Dat in December 2023. To fund the acquisition, Karoon raised $480 million at $2.05 a share (14.6% discount) and took on a US$340 million credit facility.

The deal was pitched on three pillars:

• Geographical Diversification: Karoon wanted to cut its reliance on a single asset, the Baúna operations offshore Brazil

• Immediate Production Scale: Who Dat was forecast to lift calendar-year production by 57-63%

• Low capex, high margins: Marketed as a "mature, mid-life" cash generator that would pay down debt and fund development elsewhere with little capital

Most of Who Dat's problems didn't surface until 2026. We'll get to those a little further down.

One of the cheapest large caps on the market

Before this year, Karoon was objectively cheap and deeply undervalued. Here are a few data points

• EV/EBITDA of about 2.5x in late 2025

• Free cash flow yield of about 33% in late 2024

• Macquarie said in June 2024 that Karoon could generate its entire market cap in free cash flow over four years

Peers were trading on 5-7x EV/EBITDA, and a decent free cash flow yield for an ASX 200 company usually sits around 7-10%. So on paper, the stock was cheap as chips and heading into a period of cash harvest.

Two major downgrades

Until June, Karoon was tracking roughly in line with Woodside and the broader energy index. Then it fell 11.5% on 16 June after announcing:

• Total production guidance cut to 7.2-8.2MMboe from 8.1-9.2MMboe, with the midpoint down 11% to 7.7MMboe

• Who Dat guidance cut to 1.2-1.5MMboe (NRI) from 2.1-2.5MMboe, with the midpoint down 41%, while Brazil guidance is unchanged

• E manifold restart pushed to 2H27 subject to lab analysis, with a remediation plan including removal of the failed riser planned for the September quarter

  • The E manifold is a seabed hub linking several Who Dat wells to the surface via a riser, now offline after the riser failed

• Baúna interventions at SPS-92 and PRA-2 hit by mechanical issues and weather delays but both wells still expected online around mid-year

Macquarie cut its price target 25% to $1.50 the next day, flagging further downside as the operational problems stretch into 2027. The stock fell another 13.3% to $1.42 (though Brent also tumbled 5.6% on this day).

The second cut landed on Monday. A newly installed downhole cable failed at SPS-92, one of the two Baúna wells that needed intervention in June.

• Baúna 2026 production guidance cut to 5.4–5.7 MMbbl from 6.0–6.7 MMbbl, a 13% reduction at the midpoint

• Total CY26 production guidance cut to 6.6–7.2 MMboe from 7.2–8.2 MMboe, a 10% reduction at the midpoint, with Who Dat guidance unchanged

• Unit production cost guidance raised to US$15–16/boe from US$12–15/boe on lower output against a fixed cost base

• Insurance recovery may partially offset lost production revenue and reimburse substantially all repair costs, subject to policy terms and insurer confirmation

Across both downgrades, the midpoint of Karoon's 2026 production guidance has fallen 20%, from 8.65MMboe to 6.9MMboe.

Putting it all together

Karoon is a big 'what if' kind of stock. Macquarie's 2024 cash flow forecasts were conservative, assuming oil would drift down towards US$65 a barrel over time. Brent is now at US$102. In theory, Karoon should be absolutely printing cash right now.

Instead, shareholders were diluted by about 40% to buy into Who Dat, and this year's guidance for the asset has since been cut by 41%. Macquarie said in June that "the lengthy delay to recovery at Who Dat is an overhang."

Baúna had been the part of the business holding up, with the analysts recently noting it had "returned to strong production rates" and "has generally been performing well." Now it has production problems of its own, and Karoon is left running two late-life assets with plenty of baggage.

That said, Karoon remains unhedged, so it's fully exposed to Brent at these prices. Macquarie describes it as a "near-term tactical oil price call."