I guess nothing really new but I good read:
KAROON ENERGY (ASX:KAR)KAR has grown into a $1.5 billion oil producer through the transformational acquisitions of Bauna in Brazil and Who Dat in the Gulf of Mexico, RST told *.“Whilst WHC put on a masterclass in how to make an acquisition (using cash and vendor finance), KAR were not as clever or fortunate,” he said.“For both acquisitions, they undertook dilutive capital raises – the second (at $2.05 per share) far exceeding the size that investors were expecting.“But every cloud has a silver lining, and it is this caution with management that presents the current opportunity.“On consensus earnings forecasts, KAR is trading on a notably depressed PER (price earnings ratio) of just 3.7x this financial year and 4.1x next.“However what is even more pertinent is the anticipated free cashflow that the two projects are likely to generate. On our internal model, we generate industry high cash yields.“If we put aside deferred consideration to Petrobas (the state-controlled company from which KAR bought the Bauna oil field) and newly added appraisal capex at Who Dat, we forecast free cash flow yields in excess of 30 per cent per annum over the next three years.”“Allowing for these one-offs and growth capex, our model generates free cashflow of 14 per cent, 26 per cent and 20 per cent respectively over the coming three years,” Romano says.In total, RST calculates that the company could generate 60 per cent of it’s market capitalisation in free cash flow in the coming three years.Visit *, where ASX small caps are big dealsAnd therein lies both the issue and the opportunity.“If management’s preoccupation is on building an empire, then shareholders will see less of this cashflow than they should.”And there are some slightly alarming indicators in this direction, he says, including the structure of remuneration KPIs, which are based on absolute numbers and not earnings per share.“The latter being considerably more aligned with shareholders.“However, if management can strike the right balance between growth and rewarding long suffering shareholders, then the sustainable divine yields could easily approach very high single digits or low double digits.“At present, there are a number of institutional investors calling on KAR’s management to do precisely this.“We are supportive of their efforts and are cautiously hopeful that KAR’s management will respond appropriately,” Romano says. “And we believe that the stock will significantly rerate should we see a pivot towards dividends and capital management.”
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