Whilst there's a lot of doom & gloom from some circles on HC re...

Whilst there's a lot of doom & gloom from some circles on HC re KAR, interesting to see Paterson's price downgrade to $9.19 as of now but interestingly please note the price attributed to success at Kronos 1 as $17.60!

Released 14 April 2010

"KAROON GAS (KAR)KAROON GAS (KAR) - HOLD
CRITICAL KRONOS-1 APPRAISAL PROGRESSING TO TARGET DEPTH

Kronos-1 Appraisal Progressing. On 19th Feb 2010, the Kronos-1 appraisal well was spudded which has a target depth of 5322mRT. This well is designed to test and evaluate the Plover reservoirs located high on the Poseidon structure. The key objective of the Kronos-1 appraisal is to define potential commercial production rates and gas composition on the crest of the greater Poseidon structure. The results should fi rm up the Poseidon volume estimates which are currently 3tcf (P90), 7tcf (P50) and 15tcf (P10). Target depth is expected to be reached in the second half of April with final results expected at the end of May.

Success at Kronos-1 Critical. Success at Kronos-1 is critical following disappointing results from Kontiki-1 (dry-hole) and Poseidon-2 (lower than expected fl ow-rates). Any result significantly below KARs current P50 estimate volumes of 7tcf would struggle to support a standalone LNG
development based on KARs current Capex estimate of US$10.4bn (US$4.2bn KAR share).

Robust project economics if successful. KAR has released an indicative project concept based on a 7tcf gas discovery. The scope includes a semi-submersible platform, 14 wells (10 producers and 4 CO2 injectors), Floating Storage Unit, ~1000km pipeline to Darwin and a 5 MTPA LNG train. Based on this development, the economics provided by KAR are robust (Assuming US$70/ bbl) with an NPV of US$6.9bn (US$2.8bn KAR share) amounting to ~A$17.60/sh. KARs current share price is trading at a 50% discount to this which shows significant upside should be realised if
Kronos-1 results are positive.

Options if Kronos-1 results are negative. A negative result at Kronos-1 will certainly be a setback for KAR. To support KARs 5 MTPA LNG development, additional volumes would need to be found during the later half of their Browse Basin exploration program which extends to the end of 2011.
Other options may be to pursue a lower cost development such as a Floating LNG or negotiate a tie in to one of the other surrounding developments in the area such as Browse (Operated by Woodside) or Icthys (Inpex).

Forward Program. KAR has signifi cant exploration activity in 2010 and beyond. After the Kronos-1 appraisal, the Browse Basin focus will switch to Lion-1 (1tcf target) with further drilling around KARs Browse basin acreage to continue to the end of 2011. Exploration drilling in Brasil is expected to start early 2011 with the Pico do Jaragua East prospect (260mmbls) favored to be the first candidate. The farm out process has attracted signifi cant interest with 25 companies participating. The farm out selection process is expected to be completed mid 2010. Study work continues in the Peru Tumbes Basin (Block Z38) with 2 main leads (50 to 250mmbbls potential) identified. Drilling is expected to start mid to late 2011.

We have downgraded our recommendation to a hold with a price
target of $9.19/sh. The results of Kronos-1 will have a major impact on
KARs valuation. Given the disappointing results from the Kontiki-1 and
Poseidon 2 wells, success at Kronos-1 is paramount to de-risk the P50
volume estimate of 7tcf and support an LNG development. Longer term,
it should be noted that KAR has a deep exploration portfolio and a high
level of activity until the end of 2011 (2010 fully funded, 2011 requires
further financing) which may open up further opportunities."