Karoon Energy: Earnings power from day 1
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 14 January 2020, 4:00 PM
- Sectors Covered:
- Mining, Energy
- We initiate research coverage on Karoon Energy (KAR) with an Add recommendation (Morgans clients can login to view detailed reports and price targets).
- Karoon is currently moving to finalise the US$665m acquisition of Petrobras’ Bauna operations. Bauna is currently producing ~19,000 barrels of oil per day.
- The Bauna acquisition will deliver to Karoon >A$300m of EBITDA per annum from an existing high-margin conventional oil field.
- Regulatory sign off appears likely given the government approved process undertaken by Petrobras. We expect the transaction to be finalised in Q1 2020.
- We see the acquisition as delivering de-risked and highly efficient cash flow to Karoon, underpinned by high operating margins and lack of required capex.
De-risked and efficient earnings the key selling point
The major focus of our positive investment view on Karoon is the fact that Bauna is an existing producing field, with large operating margins and a lack of required capex to be spent.
This drives our positive view on Karoon’s earnings quality and capital efficiency.
This compares favourably to the majority of Karoon’s ASX-listed peers who are in (or are about to enter) periods of heavy capex expenditure to support the forward earnings that underpin their market implied valuations.
Given this observation we find it interesting that Karoon is trading at such a large discount to these peers on several metrics, and believe it highlights an investment opportunity.
Funded and ready to go
Karoon is buying the Bauna operations for US$665m from Brazilian energy major Petrobras, which has been in a multi-year asset divestment process.
While a large acquisition for Karoon, we note that the company has already secured debt and equity financing.
Now waiting on regulatory approval, which remains a risk, we expect the transaction to proceed given Petrobras/Karoon have followed the ANP Brazil Government approved process under new laws and guidelines introduced post 2016.
Karoon expects to receive approval during Q1 of 2020.
Growth profile inviting
A healthy earnings profile combined with a high valuation (Morgans clients can login to view detailed reports and price targets) support our positive view on Karoon. However, we also note further upside potential from multiple avenues of growth:
- Peru exploration (spud Q1)
- Bauna pump replacement (low risk routine work)
- Patola tie in
- SPS-57 tie in
- Neon and Goia developments
We expect in time these growth options could see Karoon deliver upside beyond our base case.
Initiate coverage with an Add recommendation
We initiate research coverage on Karoon with an Add recommendation (Morgans clients can login to view detailed reports and price targets).
The healthy earnings that will be generated by the ~19mbopd of existing production is set to grow from 2022, with Karoon planning to install 3-4 new pumps at Bauna (it is worth noting this will see a temporary drag on 2022 earnings given the ~A$130m expenditure on new pumps will be expensed through the P&L as a workover cost not a capex item).
We see an opportunity to accumulate a position in Karoon ahead of the Bauna acquisition finalising.
The key risk to our call is oil price risk, regulatory risk and execution risk.
Morgans clients can login to view our detailed report and share price target for Karoon Energy (KAR). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: Analyst may own shares.The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.