Depends on how you value it. Sure it looks a bit of a premium...

Depends on how you value it. Sure it looks a bit of a premium (I'll come back to that in a bit), but 1 of the biggest criticisms of the KAR valuation has been their exposure to 1 producing asset and their lack of diversification.

KAR's valuation before this was around about $37,500 per producing barrel and the acquisition is at around $58,000-$66,000 so it seems more expensive, however if you compare to our peers in Australia, lets look at BPT, their current market cap is broadly based on $72,000 per each producing barrel and the expectation of these GOM assets are that their operating profit levels will be much higher than that of BPT due to the nature of the heavy upfront expenditure related to deepwater developments, ie. they have high upfront capital commitments, but as flow rates are generally much better they can generate better returns through low ongoing operating costs which is what we see here with only $5.70 operating cost per barrel.

I also like the higher exposure through higher WI% in the exploration blocks (especially as they also include a carry on exploration costs).

Whilst the upfront valuations of this specific acquisition look to be on the high side, there is huge upside with the exploration areas, but the big area of improvement for KAR shareholders is closing the valuation metric differences that we see with BPT and others, and thats what this acquisition is designed to do.

Ie. BPT generated 50k boepd production in the Sept quarter and are valued at $3.6bn ($4.1bn EV). This will take KAR's production to close to 45k boepd and our market cap (based on the TERP) will be around $1.8bn (based on $2.30 - as per presentation) and EV of around $2.15bn. Thats still a significant valuation gap with BPT which would expect to start to be closed IMO.

I'm pleased with this acquisition and will likely take up all my rights in the EO and will also apply for shortfall shares.

The one area that KAR will be on the lookout for going forward, is continuing to expand on growing their 2P asset base which will include taking Neon to FID and also adding reserves with the expansion opportunities at Who Dat, though I wouldn't count out a look to add assets that require development from smaller companies without access to funding. KAR will be generating significant cashflows going forward and with relatively low capex levels, have significant opportunities going forward in what they can use that cashflow for (including starting up a dividend programme - which for me should start from this transitional 6 months to the new financial year).