credit suisse upgrade to outperform this morni

Karoon Gas
Invoking a Grace period
Event
?
KAR has successfully raised A$150m via an underwritten institutional placement at A$5.10/sh (which represented a 9% discount to the closing price prior to the raising).
KAR also intends to undertake a further SPP.
Impact
?
Managing near-term funding pressures:With the window to farm-downGrace (where KAR retains a high 90% interest)narrowing as Proteus-1
approaches target depth and management accelerating planning ahead of the
second Santos Basin drilling campaign
the placement appears more about funding
imminent capital obligations. While management claims that
additional funds would also aid KAR?s negotiating position regarding the numerous farm-out proposals, with ~20 interested parties already showing
interest across the 5 farm-out proposals,
it would appear enough
competitive tension
already
exists at this early stage.
?
Asset
sales
needed to fund extended program:
Given
the JV
is
likely to
take up a further contingent well slots in the Browse Basin ( with 3 further wells
beyond Grace
possible) and KAR proposing 4-6 wells in the second phase of
Santos Basin testing we estimate that the capex program over the next 18
months could amount to A$450-650m based on KAR?s existing
equity
interests. While KAR has given itself an extended 12
months to finalise a
number of asset sales (including a 5-10% divestment of Poseidon and a 15%
further farm-down of its Santos Basin acreage),
the risk remains that these sales proposals are moving more slowly than KAR?s proposed capex
commitments, which could see
further bridging equity raised (most likely) or
activity
delayed (which appears unlikely).
Earnings
and target price
revision
?
NAV falls
to
A$9.16/sh from A$9.86/sh:
The 7% cut reflects the dilution from
the A$150m placement and an assumed A$15m SPP
(with the money raised here unlikely
to reach the A$60m maximum cap, in our view).
Price catalyst
?
12-month price target:
A$9.00
based on a
DCF
methodology.
?
Catalyst:
We expect Proteus-1 will reach target depth in the coming weeks.
Results from analysis of the Bilby core samples are expected in late August,
which could precede an initial resource estimate. Finally the Share Purchase
Plan will close on 3 September
, which could further supplement KAR?s
funding position
.
Action and recommendation
?
Maintain an Outperform rating and a A$9/sh target:
With
further appraisal
planned and with greater emphasis being placed on development options in
the Browse and Santos Basins, we believe the fundamental backdrop for KAR
is improving. However with the next phase of drilling to confirm the growing
resource potential at Kangaroo and Bilby not set to commence until early
2015, the focus in the near-term is likely to remain on successful asset farm-downs to cement the funding position ahead of an active 18 months of drilling.

Cheers,
Stevo