Operational highlights over the Dec Qtr Outside of the new Maruja (KAR 20%) oil field discovery in Brazil, Karoon has made progress with the acquisition, processing and interpretation of detailed 3D seismic at Greater Poseidon, and at the 100% owned Santos Basin Blocks and Tumbes Basin in Peru.
Browse drilling The timing of the upcoming ConocoPhillips operated 5 firm plus 3 option drilling program in the Browse Basin that was proposed to begin early in 2Q 2011 remains subject to resolution of environmental approvals with the Australian Government. We expect a rig to be contracted shortly after this approval is granted.
Buy rating maintained Our 12-month Buy rating is based on our view that the 5-8 well Browse Basin drilling still has potential to confirm commercial Greater Poseidon area gas reserves to support Darwin LNG T-2 expansion, plus we believe the highly promising Brazil Santos Basin oil exploration drilling proposed late 2011 / early 2012 has strong potential to add very material value. Factoring in updated cashflow figures from the December quarter, and a small change in the number of shares in issue, leads to modest improvements to our loss-per-share estimates.
Valuation Our 12-month share price target of A$11.57 is based on a Poseidon-backed NAV of A$7.00, plus A$4.57 (risked) for South American exploration assets and our estimated value of a 54 mmbbl discovery at Maruja (KAR 20%).
Operational Highlights
Karoon is an exploration company that has no current production.
The most significant event over the Dec quarter was confirmation of the Petrobras operated Maruja (KAR 20%) oil field discovery in the Santos Basin, offshore Brazil.
Karoon also progressed with the acquisition, processing and interpretation of detailed 3D seismic at Greater Poseidon, and at the 100% owned Santos Basin Blocks, and Tumbes Basin in Peru.
The timing of the upcoming ConocoPhillips operated 5 firm plus 3 option drilling program in the Browse Basin that was proposed to begin in early 2Q 2011 remains subject to resolution of environmental approvals with the Australian Government.
Maruja (KAR 20%)
The 8.5m section flow tested from the primary target Oligocene sandstone reservoir achieved a stabilised flow rate of 4,675 bopd (gross) of 38 degree API oil and 0.8 mmscfd of gas. This result was achieved through a ? inch choke with flowing well head pressure of 1,050 psi.
Our very preliminary estimate of the size of the Maruja oil field is based on DeGolyer MacNaughton?s 31 August 2010 report which estimated a pre-drill Oligocene reservoir potential of around 54 mmbbls; however, it?s worth noting that this potential was based on a thicker net reservoir section then what was actually encountered, but also a lower porosity estimate, in our view. Should Maruja end up as around a 50 mmbbl discovery, then we believe it is highly likely that it will become part of the hub development concept proposed by Petrobras in conjunction with nearby Tiro and Sidon oil field discoveries. We expect future extended flow testing and appraisal drilling at Maruja to help confirm field size and production capacity.
3D Seismic
The interpretation of 2,828 sq km of 3D seismic data over the Greater Poseidon structure that straddles WA-315-P and WA-391-P (COP 60%, KAR 40%) offshore Western Australia continued over the Dec qtr. Karoon is now working with a full-time data cube that has provided encouraging results, and this data will now be used to help determine the location of future wells proposed in the upcoming drilling campaign to evaluate Greater Poseidon for potential future field development.
In Karoon?s 100% owned Blocks in the offshore Santos Basin, a 750 sq km wide azimuth 3D seismic program was completed to help improve subsurface imagery, particularly in the deeper pre-salt section in and around the Morro prospect. The processing of this data is continuing and it is to be interpreted over 1H 2011. This data is expected to improve exploration well locations that are proposed to begin from around late 2011 / early 2012.
In the Z38 Block in Peru (KAR 75%), the company has completed the processing of 1,500 sq km of 3D seismic data and interpretation has commenced.
Encouraging early results have delivered several new leads and prospects. These are now being high graded for potential drilling in 2012.
Browse Drilling
Karoon and its joint venture partner and operator ConocoPhillips are keen to facilitate the Browse Basin drilling program. They remain optimistic that a resolution can be reached with the Australian Government over its decision to make the Browse drilling program "a controlled action" under the Environment Protection and Biodiversity Conservation Act (EPCB).
The Australian Government requirement for assessment and approval under the EPCB implies the drilling program must be assessed by a public environment report before it can be approved and actually begin. While this exercise has potential to delay the drilling program from its intended late 1Q 2011 start-up, we believe once environmental approval is granted a rig will become available to the joint venture fairly quickly. The Browse permit operator ConocoPhillips has supplied additional information, including additional environmental controls that are expected to help the Government reach a decision on the program. Also, outside of Woodside or Chevron, there are not many 5-8 well back to back $500+m drilling programs that become available to the rig contractors offshore Western Australia.
Investment Case
The recent Karoon share price correction after concerns were raised by the Australian Financial Review on 20 January 2011 with respect to a potential delay to the timing of Browse Basin drilling has created an opportunity to accumulate Karoon shares, in our view. Our 12-month outlook for Karoon remains positive on the potential to add significant value from future Australian Greater Poseidon Browse area gas drilling and highly attractive Brazil Santos Basin area oil exploration drilling.
We see potential for the Browse program to confirm commercial gas reserves at Greater Poseidon to help support Darwin LNG T-2 expansion. The interpretation of new 3D seismic data is expected to help reduce Greater Poseidon area drilling risk. Only one valid flow test has been conducted on the Greater Poseidon structure to date (Kronos-1 flowed 26 mmcfd, but has a calculated flow potential in excess of 100 mmcfd). We expect the ConocoPhillips-led JV to flow-test some of the new Browse Basin wells. Karoon estimates the Greater Poseidon area P50 contingent resource to be in the range of 3-15 TCF.
We remain very positive on the potential of the highly promising Brazil Santos Basin oil exploration drilling planned from around late 2011 / early 2012. The Pico do Jaragua (Alpha) prospect has high quality direct hydrocarbon indicators (DHI) on seismic and an independently certified mean prospective resource of 372 mmbbls. We estimate this prospect has potential to be worth A$5.48/KAR share, assuming a 50% probability of success. Similarly, Morro Da lgreja (Beta) has an independently certified mean resource of 633 mmbbls and we estimate it has potential to be worth A$5.59/KAR share, assuming a 25% probability of success.
KAR Price at posting:
$7.57 Sentiment: LT Buy Disclosure: Held
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