Stock: KAR AUName: Karoon GasPrice: A$5.17 (at 4:00, 13 Sep 13...

Stock:


KAR AU

Name:


Karoon Gas

Price:


A$5.17 (at 4:00, 13 Sep 13 GMT)

Market Cap (m):


A$1,323

Current valuation (DCF):


A$9.12

12mth price target:


A$9.00

Recommendation:


Outperform

Volatility index:


Very High



Event

· KAR released production test results from the Proteus-1 well in the Browse Basin. While the headline maximum flow rate of 7.3mmscf/day is well below the 26mmscf/day and 30mmscf/day delivered at Kronos-1 and Boreas-1 respectively (with a smaller choke size), KAR highlights that production was constrained to maintain downhole stability and due to equipment constraints. KAR believes that the reservoir at the Proteus-1 location could produce in excess of the typical 100mmscf/day threshold with a production well.



Impact

· Contributions from both the Montara and Plover Formation: While previous wells have tested the Plover Formation, this is the first where KAR has successfully production tested from the shallower Montara formation. That said, with the tested carried out over a 330m open hole section across both the Plover and Montara formation (vs. a 50-70m perforated zone at Boreas and Kronos) it remains difficult to ascertain the contributions from these individual reservoirs. The schematic in the September review also suggests that the GWC encountered in the Plover Formation at the Proteus-1 location is indeed higher when compared to the Western Poseidon Area, perhaps confirming reservoir complexity across individual fault blocks.

· Higher condensate, lower CO2: The recorded condensate yield of 19-22bbls/mmscf was the highest delivered to date (almost double the rate reported at Kronos and ~14% greater than the rate reported at Boreas). Furthermore CO2 levels of 12% are below the 16% encountered at Boreas, but still well above the 8.5% CO2 content reported at the nearby Ichthys field.

· Still 18 months of appraisal likely: The Proteus-1 well was always a fairly aggressive step-out well, located in the east-most fault block. Consequently the confirmation of gas that can flow at commercial rates ~12km south-east of Boreas-1 provides further confidence that the resource size at Poseidon is growing. We believe that success at Proteus-1 confirms the minimum resource required to underpin a standalone FLNG development (indeed ConocoPhillips is due to complete its own FLNG design by November). That said, with an additional 2 contingent well slots taken up (to potentially appraise the western and northern extend of the greater Poseidon structure), a definitive update on the resource position at Poseidon is unlikely until late 2014.



Action and recommendation

· Maintain an Outperform rating and a A$9/sh target: With KAR now delivering the 3rd successful production test at Poseidon, concerns surrounding reservoir productivity continue to abate. Furthermore, with both the resource and reservoir quality contained within the Proteus fault block now largely de-risked, this could support KAR's ongoing plans to divest up to to 10% of Poseidon over the next 6-12 months.


Cheers,
Stevo