http://www.heraldsun.com.au/business/in-the-black/pegasus-cp-ones...

http://www.heraldsun.com.au/busines...an-drill-and-see/story-fni0d787-1227096631408

ACTIVIST shareholders are great for headlines and can be very helpful in shaking up sleepy companies and boards.
However, you need to be very careful when the company they are targeting is stuffed full of cash and the agitator’s plans for the company are far from clear.
The attempted board shake-up at Karoon Gas by Indonesian/Swiss fund manager Pegasus CP One is one that might look appealing on the surface.
The basic story Pegasus is pushing is that Karoon is set to “blow’’ the $690 million it earned — plus a further potential $200 million — from selling its Poseidon discovery in the Browse basin to Origin.
By “blow”, they mean spend on more exploration in offshore Brazil, where Karoon has enjoyed significant success hitting oil in the Kangaroo and Bilby prospects.
As an aside, the attackers, who are proposing three new board members, point to the fact that executive chairman Robert Hosking has three members of his extended family working in the company — to which he has replied with details about their involvement in failed or competing companies.
If Pegasus has its way and seizes control of the board, it seems its plan is to move out of exploration to conserve cash and move into mergers and acquisitions.
While there is always some appeal in hanging on to a big chunk of cash, the problem in this case is that Karoon earned that cash doing exactly what it is proposing to do in Brazil.
Discovering oil and gas is expensive and high risk but Karoon has done a fairly good job of it by growing its 2004 float market capitalisation of $8 million to the current $800 million plus.
Its 10-year drilling success rate of 70 per cent and 78 per cent in the past couple of years is actually very good and there is little doubt the value of the company would rise sharply if it proved up significant resources off Brazil, given its unrisked prospective resources are already estimated at 2.9 billion barrels.
The cost to drill is a hefty one of around $US100 million ($87.6 million) a well but that is the sort of risk Karoon has always taken and has more often been successful than not.
The alternative of abandoning a value-adding discovery program for an untried mergers and acquisition strategy seems more risky than sticking to the knitting, particularly when shareholders don’t have much of an idea what sort of assets the new directors will suggest.
Karoon Gas is a hold for now, particularly as it comes with a free ticket to the potentially fiery shareholder meeting on October 27.