Small Caps | Sep 21 2021
More detail is being gleaned about the Bauna field where Karoon Energy appears set to become a scale oil producer with growth potential
-Bauna field performing, decline rate better than previously expected
-Well budgets maintained, production growth to commence in FY23
-Strong free cash flow yields envisaged for Karoon Energy in FY23, FY24
By Eva Brocklehurst
The way forward for Karoon Energy ((KAR)) is becoming clearer, as further detail on Brazilian expansion plans was delivered with the FY21 results. Morgan Stanley finds the stock compelling, assessing around 50% upside to its discounted cash flow valuation at US$70/bbl, and amid the successful delivery of the Bauna interventions and drilling of the Patola wells.
The Bauna field is performing, with a decline rate of -10% in FY21, better than what was expected when the tenements were acquired. Macquarie was pleased and, following the upcoming drilling campaign, models 28,500 b/d production in FY24.
Morgans is impressed with FY22 production guidance of 4.2-4.6 mmbbl and also highlights the fact this guidance was based on a higher decline rate of -10-15%, suspecting Karoon may revisit guidance once maintenance of the company's FPSO chartered floating production/storage facility has been completed.
The Maersk rig will arrive in the second quarter of 2022. The workover program includes replacing submersible pumps at two wells with gas lift to be introduced to a third and the tapping of a new oil zone at a fourth. The rig will then move on to drilling Patola.
On the existing production rate of 14,000 b/d, Karoon has maintained a budget for well workover at US$110-130m and the Patola development at US$175-195m, expecting production growth will commence early in FY23.
While cost guidance of US$28-32/bbl for FY22 is higher than brokers previously expected, this is assumed to reduce to below US$20/bbl after production receives a boost from the current well interventions and drilling at Patola.
The rise in production costs is temporary and should fall as production rises from FY23, Morgan Stanley asserts, noting increased costs are partially stemming from maintenance expenses to address corrosion on FPSO piping.