This is transformative for Karoon and should result in a significant re-rating.
1. Valuation re-rating as set out by @poshman with a second asset in a new, more developed GOM jurisdiction.
2. Extension of production life, reserves and exploration potential. Now provides Karoon shareholders a stable long life asset with world class low production costs of US$5.70/bbl.
3. Exploration & production upside near-term. Pro-forma 4-4.5m bbls of production in FY24 but looks like there is significant exploration & production upside within 12 months with new drilling program in Who Dat (3 wells Q423), Who Dat East (FY'24 drilling) and Who Dat West & Sth (drilling and tie back Q3&Q4'24) could add 52m plus 148m bbls gross to 2P reserves. Who Dat's platform is operating at 61% and 39% capacity for oil and gas so plenty of room for more production. It looks to me that this is the rationale for Karoon on the upside and in line with management's goal of adding value to production and reserves through its drilling experience in Brazil and Australia.
4. Deep water. Pleased that they have "stuck to their knitting" in deepwater where they now have significant low cost management resources in situ at Bauna that can be deployed across Who Dat expansion if & when required.
5. Funding. Very pleased to see them using US$274m debt plus US$171m cash on balance sheet. This is 58% of the acquisition costs so significantly reduces dilution on shareholders. Note the company excludes the November and December cash flows at Bauna which should be US$80-100m, so creates an additional buffer on financing by the time they close in mid-late December. With the cashflow of the combined entity ($465m EBITDA proforma), the company could conceivably pay-down the acquisition debt within 12 months quite comfortably.
6. Room for Neon. The size and CAPEX committments at Who Dat does not preclude a FID decision at Neon in 1H24. Brazil will remain an important jurisdiction and I suspect remains an attractive source of M&A going forward.
Well done to CEO, Julian Fowles and the whole Karoon management team. Looks like Julian's contacts at Shell adding value as Shell the operator of the Mars oil pipeline at Who Dat.
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