Small Caps | Aug 17 2020
Karoon Energy has struck a revised deal with Petrobras for the Bauna oilfield, ushering in a new era as an ASX listed oil producer.
-Significant upside on a 12-month view
-Can avoid debt financing with new deal
-Bulk of Bauna payment deferred
By Eva Brocklehurst
In a rare event for a mature industry, Karoon Energy ((KAR)) will be making the transition to an ASX oil producer from an oil explorer on completing the acquisition of the Bauna oil field in Brazil. This transition to a 16-17,000 bpd oil producer with growth prospects should enhance the upside value in the shares and raise investor interest considerably, in Macquarie's view.
Karoon Energy, following a strategic review, concluded that its Brazilian oil strategy in the South Santos basin was the best outcome for shareholders. Subsequently, the company has obtained revised terms for the Bauna acquisition.
Morgan Stanley considers this a “very good” amended deal with Petrobras. A lower firm price and contingent deal on higher oil prices should share the risk between purchaser and seller.
The broker expects it will take some time for investors to come to terms with the new look for Karoon Energy but the outlook is attractive. At US$45/bbl long-term oil, Morgan Stanley values Bauna at almost $1.14/share.
This includes a -20% discount to factor in risks. The broker also asserts no other company in Australia under coverage in this sector has such upside on a 12-month view upon successful delivery.
Given the importance of the Bauna acquisition and the plans for the CEO to retire at the AGM in November, Macquarie suspects candidates with Brazilian experience are likely to be canvassed, although an existing profile with the Australian market would also be important given the ASX listing. The broker notes further approvals from the regulator and environmental licences are still required.
Karoon Energy can proceed with the Bauna deal without the need to resort to debt as a result of the revised transaction. This is a critical positive, Morgans asserts, because it leaves the company with 100% ownership of an oil field that is already producing 16,000bpd.
Macquarie also points out Karoon Energy has withdrawn from its Great Australian Bight block EPP46, which is considered a positive given the likely costs involved in exploration of that province.
Consideration will be paid via US$150m on close of the transaction (anticipated in the September quarter) along with the US$50m deposit that was paid in July, as well as a working capital adjustment and interest payable.
Deferred “firm” consideration payable 18 months after the transaction closes is US$380m less adjustments and less the US$150m. The company calculates the total payable amount of “firm”consideration after adjustments will be US$200m.
Contingent payments will be made reflecting the oil price, up to US$285m. Morgan Stanley assumes a contingent amount is never paid for modelling purposes since its oil price assumptions are lower. Even if oil prices move higher then this is a good problem to have, the broker adds, given the increased cash flow.
Moreover, the new terms defer the bulk of payment out to 2022-26 which can be obtained from cash flow as a result. RBC Capital Markets calculates Karoon Energy will generate around US$200-300m in free cash flow in 2023 and agrees, ultimately, this Karoon may pay less than the stated figure.
As a result, Karoon is significantly de-risked, becoming an unhedged oil producer. The company expects to spend US$150m over the next two years to boost production to its stated target of 25-30,000bpd.
RBC forecasts free cash flow break-even for the project of US$25-30/bbl, excluding transaction costs. The broker, not one of the seven stockbrokers monitored daily on the FNArena database retains an Outperform rating and $1.25 target. The database has three Buy ratings with a consensus target of $1.30 that suggests 68.4% upside to the last share price.
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