All I want to talk about here is the NEW karoon post petrobas deal. Please feel free to add comments as I may have missed something.
Facts:
1. Karoon in exclusive talks "cannot be gazumped" by third party - AFR
2. "no equity raising expected." - AFR
3. 12 month process - AFR (oil price has been between 50-25, deal bidding would of been at an average of $40 IMO)
4. Bauna Block -> AFR says 80m barrels left, The Australian says 200m when it begun - perhaps 100m left.
5. Tartaruga Verde -> The Australian says 350m barrels of oil
6. The Australian’s DataRoomcolumn reported last week that Woodside Petroleum and BHP Billiton may be interested in teaming up on Brazilian acquisitions.
7. The reserves would see Karoon rival Woodside on oil (but not gas) reserves and give it more oil reserves than Santos and Oil Search - The Australian
8. 45,000 barrels per day out of Bauna - ability to go higher
9. 150,000 barrels late 2017 out of Tartaruga -> 50% share to karoon
10. Bauna, just 40km from Karoon’s Echidna and Kangaroo prospects
11. It would set Karoon up as a decent sized choice for energy investors keen to get exposure to oil rather than gas. (woodside has ALOT of exposure to GAS, would like to get more exposure to OIL)
12. Oil in Brazil is in demand - light sweet, does not need as much refining.
Financials
1. Karoon has $480m in cash / 370m USD
2. Analysts I have spoken to say the cost of getting oil out of brazil is $30.
3. Bauna was bid at around $500m in Jan. we can expect final deal to be >$1b, I expect $1b-1.2b USD with some more costs associated with the set up of Tartaruga Verde field.
So how does Karoon afford $1b-$1.2b USD - with only $370m in cash. Lets go into the cashflow analysis of the deal.
Assuming 100M barrels in Bauna + 175m TV (50% share of 350m) = 275m
Cost of oil in Brazil is $30 - so at $40 oil - $10 profit, $50 - $20 profit.
Cashflow on oil price
* $40 oil: 275m barrels x $10 = $2,75b USD
* $50 oil: 275m barrels x $20 = $5.5b USD
Bidding was done over the past 12 months -> OIL price $25-$50 -> I think its safe to assume deal mechanics would of been done in the region of $40.
So if the profit on the whole deal is somewhere between $2.75b -> $5.5b then how much would karoon pay? I think $1b USD- $1.2b USD would be about right.
As noted, Karoon only has $370m in cash and needs to find another $700-800m USD. How does it do that? It partners - Woodside or BHP have been speculated to wanting to get into Brazilian assets. I think woodside is particularly interesting due to its heavy reliance on GAS, and this is a pureplay in OIL.
Now - we forget that PBR just gave back the 35% interest in Kangaroo & Echidna which has 139m barrels of oil ... with more appraisals to come. We also know Kangaroo & Echidna are only 40k's from Bauna.
In my opinion the whole package will be wrapped together, current Brazilian assets + Petrobas assets. So what we do we have in total? 139M barrels @ Kangaroo, 100m @ Bauna & 175m @ Tartaruga Verde = 414m Barrels of oil.
414m barrels. @ $40 that gives over $4b in total profit, $50, $8bil -> highly leveraged to oil price as you can see.
Heres the kicker, the petrobas deal was negociated over 12 months when oil hit as low as $28. The deal karoon will make with its partners are now AFTER opec deal and when oil is at $50. This timing could of not have got better. Woodside/BHP/Whoever will see $8b of profit($50) with exploration options and massive leverage to oil price upside. I think Karoon will be able to give a perhaps 50% of the total asset pool to cover the majority of its SHORTFALL in the deal 700m-800m. I expect Karoon to take on small debt(100-200m) and give up 35-50% cashflow.
So lets look at the mechanics if they give up 50% of cashflow.
$50 oil (where we are right now)
2017(only Bauna generating, 45k barrels a day) -> $900k -> $450k share for karoon
2018(both Bauna & TV, 120k barrels a day) -> $2.4m -> $1.2m share for karoon.
Yearly Cashflow: (assuming karoon gives 50% of this deal away to minimize debt & Oil @ $50)
2017 -> $160m
2018 -> $425m (revenue of $1b)
lets compare this with other producers -> Woodside, market cap, $22b in 2015, had revenue of $5b / gross profit of $2b AUD.
Given Karoon is earning in USD / but reporting profits in AUD - what should Karoon be trading at with revenue of ($1.3b AUD) $1b / gross profit of ($634m AUD) $425m?
Now we will be highly leveraged to oil price, and karoon will be a pureplay on oil prices.
I cant tell you the exact valuation we will be trading at when 2018 comes along and we are getting 120k barrels. But I can tell you - it will be MULITPLES of where it is today.
Please feel free to question my numbers & discuss.
(20min delay)