Only a matter on time before the market re-rates Karoon Energy: Morgans

Having concluded that Karoon Energy’s current production will double, Morgans believes it’s only a matter of time before the pure-play oil stock is re-rated by the market.

On the back of the strong earnings growth that Karoon posted within its interim result, including fixed capex for the next 12 months, and heavy free cash flow generation, the broker has maintained an Add with the target rising to $2.35 from $2.30.

During the company’s first year as an oil producer, Karoon delivered US$21.1m in underlying net profit (NPAT) in first half FY22, up 124%.

Equally impressive, operating cash flow was US$84m versus negative cash flow in the previous period.

While Karoon delivered revenue of US$186.5m, up 675%, the company’s overall result was a statutory net loss after tax of -US$97.7m, after including a non-cash adjustment to the anticipated contingent consideration payable to Petrobras for the Baúna asset in Brazil, of US$121.3m net of tax, following an increase in Karoon’s oil price outlook.

Due to rising oil prices, Karoon shares has been pushed 90% higher over the past 12 months, and since releasing its interim result 23 February, the share price has jumped from $1.91 to $2.17.

Karoon has finally reached the promise land

Having been scratching around in the wilderness for a couple of decades, the significance of Karoon finally becoming profitable can’t be overstated.

Two metrics that shouldn’t be overlooked are the inflection point from which oil prices started soaring (circa US$47) and production for the half year which went from 800,000 barrels of oil to 2.5m barrels (mmbbl).

By drilling new holes at the Baúna, while also tying oil from nearby Patola – the existing facility – Karoon is expected to be able to double production rates.

Without question, increasing production rates to 8-10 mmbbl will herald capex.

But it’s worth noting that management expect the unit operating cost to virtually halve from US$28-30 in FY22 to US$12-18 in FY23.

Assuming Karoon can keep a lid on capex, Intelligent Investor believes there’s more than $4 a share of a value, and that’s at normalised prices, with today’s prices adding considerably greater upside.