Karoon Energy: Strong Production Performance in First Full Quarter Since Bauna Intervention

We increase our fair value estimate for no-moat Karoon Energy KAR by 10% to AUD 2.75, on the back of stronger near-term production and pricing expectations, in addition to the time value of money. The small, ASX-listed, but Brazilian-centric, oil producer reported fiscal 2024 first-quarter production up 69% to a record 2.85 million barrels of oil, or mmbls, ahead of our 2.3mmbls expectations. Further, it says production is currently averaging just under 30,000 barrels of oil per day, equivalent to 10.95mmbls annually, again higher than we’d previously credited.

Karoon reiterated its expectation for 15% annual production decline from peak, and hasn’t changed fiscal 2024 guidance for 9-11mmbls versus fiscal 2023′s 7.0mmbls. But given the strong first quarter, we increase our fiscal 2024 production forecast by 14% to a guidance high-end 10.6mmbls from a low-end 9.3mmbls previously. And in conjunction with strengthened Brent crude futures prices since our last note in August 2023, we increase our fiscal 2024 revenue forecast by 32% to USD 865 million. Our fiscal 2024 and fiscal 2025 EPS forecasts increase 42% and 12%, respectively, to AUD 0.76 and AUD 0.45.

Karoon ended the quarter with USD 152 million in net cash, or just over AUD 0.40 per share, up 238% on the June 2023 quarter’s USD 45 million. The strong cash position is a key appeal. In addition to strong production and pricing, the cash build benefits from reduced capital expenditure now that the major capital expenditure programs of fiscal 2023 are over. Capital expenditure guidance for fiscal 2024 remains USD 19 million-USD 24 million against USD 238 million in fiscal 2023.

We expect cash to be reinvested rather than returned to shareholders. We think comparatively modest reserve life of about seven years will demand the attention of cash resources, at the expense of dividends. Karoon says evaluation of production growth opportunities remains active, including potential Neon development in addition to acquisitions.