mac research update

Don't know if anyone has seen this but a 12 month target price of $6 (released yesterday)

Karoon Gas
Funding remains the focus

Event
- KAR reported 1H14 interim financial results: A reported loss of A$8m was not unsurprising, given higher corporate costs of A$12m (up 28% on the previous period) and A$3m of exploration expenses (largely relating to the acquisition of the Chrysalides seismic in WA-482-P). This was partly offset by A$4m of interest revenue and A$2m of non-cash fx gains.

Impact
- Limited progress on asset sales: Having appointed investment banks to advise on farm-downs across Browse Basin and Santos Basin assets, KAR has now appointed advisors to manage the farm-down of its 75% interest in
Block Z-38 in Peru (a process that we had previously thought was well progressed and approaching a conclusion). With A$180m of cash on hand as at Dec-13, ~A$90m expected to be spent this quarter as drilling in the Browse Basin recommences and given a 2-well minimum commitment in Brazil this year, it appears funding pressure could emerge well before the year-end target KAR has set to complete these deals.

- Drilling commitments growing from here: Exploration commitments for the next 12 months have risen by 50% to A$169m (compared to Jun-13 levels) and includes A$93m in contractual drilling obligations relating to the remaining
2-well Browse drilling commitment (with an option to add another contingent well). The remaining A$76m appears to only include the firm Kangaroo-2 appraisal well and Kangaroo West-1 exploration well in Brazil (consistent with
the PAD submitted to the ANP late last year), but excludes any drilling in the Z-38 block (given KAR has until April/May 2015 to drill two commitment wells).

- Browse appraisal set to re-commence: Having undergone a month of routine maintenance, we expect the Transocean Legend rig will arrive at the Poseidon North-1 location in the coming 2 weeks (pending no delays). The well will appraise the Plover and Montara reservoirs in the northern-most fault block located 6.5km NE of Poseidon-1. While the well location(s) for the remaining well slot(s) are yet to be confirmed, these could appraise the
Southern-most fault block and/or the Odysseus structure to the West.

Earnings and target price revision
- NAV falls to A$6.03/sh from A$7.52/sh: We have incorporated additional drilling capex in Brazil (all 6 proposed wells on a risked basis), assumed a 35% farm-down of the Z-38 block in Peru and conservatively valued KAR on a
post-money basis (after assuming a A$100m capital raising in 2H14 ahead of drilling commitments later this year). Our target falls to A$6/sh from A$7/sh.

Price catalyst
- 12-month price target: A$6.00 based on a DCF methodology.
- Catalyst: Spudding of Poseidon North-1 in the coming weeks and progress regarding the farm-down processes underway across the portfolio.

Action and recommendation
- Maintain an Outperform and a lower A$6/sh target: Asset sales will have to be delivered to confirm the value of KAR’s core assets and provide funding ahead of an active 12 months of drilling.