bilby now 320m, page-59

MacQ latest update. Seeing you asked Black




Stock:
KAR AU

Name:
Karoon Gas

Price:
A$5.34 (at 6:10, 9 May 13 GMT)

Market Cap (m):
A$1,182

Current valuation (DCF):
A$9.63

12mth price target:
A$9.00

Recommendation:
Outperform

Volatility index:
High






Event

· KAR released further results following last week's discovery at Bilby-1 in Brazil.



Impact

· Bilby resources sizes appear to be growing: KAR highlighted that the proven gross hydrocarbon column has grown from 200m to 320m (and potentially as high as 560m from the shallowest intervals to the oil water contact and if intervals that are yet to be pressure tested are included). KAR also confirmed that the oil-bearing column extends into the Eocene sands (which proved successful at Kangaroo). Consequently we expect resources to grow from the ~60mmbbls pre-drill estimate for secondary targets. Furthermore the Campanian-aged intervals are yet to be tested (KAR's pre-drill resource estimate here was 50mmbbl), which could potentially provide further opportunity to expand the resource base (although KAR has reported limited success to date in these intervals at Kangaroo and Emu).

· However some minor risks remain: Given the inter-bedded sands and shale intervals encountered, KAR confirmed a low proven net-to-gross ratio of 22%. Furthermore, while management continues to highlight 150m of up-dip potential (given the well was drilled off-structure), much of this additional potential appears to relate to untested reservoir sections located below the oil-water contact at the Bilby-1 location. Finally reservoir porosity of up to 23% appears lower than the 25-32% seen at Kangaroo and reservoir permeability is yet to be determined. Coring of reservoir sections in the near-term will provide greater clarity regarding both porosity and permeability.

· Further testing appears likely later this year: Given the encouraging results to date at both Kangaroo and now Bilby, KAR is working towards securing a rig to undertake appraisal drilling in 4Q13 (albeit contingent on rig availability and government approvals). At the very least this program is likely to include a Kangaroo and Bilby appraisal well (to confirm the updip potential at both discoveries). However, while minimum works commitments have now been met, a further two exploration wells could also be worked into the drilling program. Given the success to date we see the Kangaroo West and Taipan as likely candidates for drilling. However, with a WA-314-P farm-down yet to be delivered (leaving KAR with a 90% funding interest in the upcoming Grace well) and given KAR will now have to fund a 65% interest in any further drilling in the Santos Basin, we estimate KAR's healthy A$228m in cash balances could be eroded by year-end.



Action and recommendation

· Maintain an Outperform rating and a A$9/sh target: Following last week's discovery, it is encouraging to see the gross oil column expand which is likely to bode well for ultimate resources at Bilby. Indeed it appears resources have passed the ~50mmbbl commercialisation threshold for a simple tie-back development. With further appraisal and exploration planned for late 2013 to confirm the discovered resource & drill de-risked exploration targets and additional resource definition surrounding the multi-billion Stingray and Great White pre-salt targets forthcoming, we believe there is a lot to like about KAR's Santos Basin acreage.

Cheers,
Stevo