Macquarie says Karoon worth $5.15 if oil > 100, page-166

I am not a day trader but agree that we are in a "risk off" environment while interest rates go up. Today looks like one of those days oil, copper & crypto down 3-4% & equities down 2-3%. Markets are going through a painful repricing of risk as central banks are forced to use interest rates to jawbone down inflation. Naturally all equities in the past month have been hurt.

However, a rising rates environment fuelled by higher oil & commodity prices does not change the Karoon thesis instead it improves it. Here's my take of where the company is now:-

1. The Patola FID and Bauna Intervention decisions were made 12 months ago in June 2021 when oil was at or under $70/bbl.

2. The rigs were contracted, long lead items purchased and local hires made at that time. This was well before shortages in materials and labour started to impact other explorations projects as we are seeing presently in 2022. Management also locked in financing and has a solid balance sheet (net cash >$200m). So Karoon is well placed to deliver on its CAPEX program.

3. If management were assuming say $65 oil to underwrite these projects in June 2021, they are ahead by 50-90% on these assumptions in the past 12 months. Assuming the mid point of say $90/bbl oil at 12,000 bbls/day thats roughly US$100m extra cash above budget , since the decision on FID on Patola and Bauna Intervention (1. above).

4. If management delivers and Hotfire is correct on his conservative $85/bbl prediction, and the expansion projects are completed shortly after December '22, the company will be generating margins on 30,000 bbls / day, after cash costs (US$15/bbl) & royalties (10%) of US$61.5/bbl. This is and annualised operating cash flow of US$664.2m or A$955m.

Karoon is therefore trading on these assumptions (US$85/bbl) on a 1x FCF yield which is not likely to continue for too long.

If oil stays above US$100/bbl for the medium term as I expect then the Macquarie bank $5.15/sh target will look too low.