NEARLY a decade ago, when Bob Hosking and Mark Smith, the heads of Victorian coal-seam gas explorer Karoon Gas Australia, got the chance to grab prime offshore acreage in Western Australia’s Browse Basin, one saw huge geological potential. The other saw huge deal potential.
“Mark was keen on having a crack geology-wise, but he said it was too big for us,” says Karoon executive chairman Hosking, who before venturing into oil and gas was one of the nation’s biggest steel exporters.
“I said, ‘Ah, it’s perfect’.”
The acquisition of the permits, which hosted the Poseidon gasfield discovery five years later, is a prime example of the strength behind the Hosking-Smith partnership that has made Karoon a success since floating as a 20c stock 10 years and one week ago.
“I don’t play geology and he doesn’t play commercial — we work really well together,” Hosking says, noting Smith, the company’s exploration head and executive director, is strong on the commercial side as well.
Karoon this month sold out of Poseidon for up to $US800 million ($850m) to Origin Energy, giving it enough cash to fully fund its near-term ambitions. But Hosking has more deals in mind, saying he wants to save the cash for development and raise $200m- $300m through farmouts for exploration in Brazil and Peru.
Hosking ran a family steel trading business before becoming a founding director of Nexus Energy in 2000, when it was focused on onshore gas. He and Smith then started Karoon with some unloved Nexus assets.
Hosking says working in the gas industry provides plenty of opportunity to use the commercial skills developed in the steel business.
Including the Origin deal, Hosking has in the past decade raised about $1.5 billion through asset sales and farm-ins that have let Karoon keep drilling and exploring. And as BG Group chairman Bob Wilson found out in 2005 when Hosking threw BG out of leases after a five-month partnership when he suspected he would be squeezed, Hosking doesn’t mess around with his deals.
The Origin deal, on June 2, surprised the market because Karoon sold just one of its assets, albeit the main one, for more than the whole of its then $629m market value. The shares rose 43 per cent, returning value that had been lost because of speculation that Karoon would need to raise equity to meet drilling commitments.
But the shares, which last traded at $3.42, are down 34 per cent for the year and a long way below the heights above $10 scaled in 2010.
The Poseidon deal leaves Karoon cashed up and with exploration ground in Western Australia’s offshore Carnarvon Basin (southwest of Browse) and Peru, and near-term oil discovery appraisal in Brazil.
Hosking, who owns just under 5 per cent of the company (down from about 20 per cent when it listed), says selling out of the Poseidon asset that had formed the bulk of Karoon’s value for most of its life was not his preferred option.
But returns from the project, which will probably be used to backfill operator ConocoPhillips’ Darwin LNG plant from near the end of the decade, are too far away. “It’s a bit disappointing, I would have liked to have seen it through to the end,” he says. “But it had a very long tail on it for the endgame. The trouble is we’ve already been there for 10 years.”
In essence, Karoon has chosen to offload Browse Basin gas and focus instead on South American oil, where assets like its Kangaroo oil discovery in Brazil’s Santos Basin could be in production in four years.
The Poseidon deal has been received as a good outcome for the company in a tough time to be selling assets, with global energy majors pulling back on spending and selling assets.
“It’s been very difficult (to sell offshore ground) because for 12 months you’ve had Shell, Apache, Chevron, BG Group and others, selling $100bn or $200bn worth of assets all over the world,” Hosking said.
That said, Hosking points to a recent $72m farm-in deal with Apache at Karoon’s Carnarvon Basin acreage last month as a potential turning point in the global sell-off.
ConocoPhillips and 20 per cent partner PetroChina have a pre-emptive right over the Poseidon stake, but Karoon will pocket the cheque whether this is exercised or not. The cash raised in the Origin deal will be saved for potential development in Brazil, rather than to fund coming exploration or return to shareholders.
Despite Karoon’s success being all about offshore gas and oil, the company’s Australian fortunes have remained intertwined with the coal-seam gas sector Karoon was floated to chase.
Hosking left Nexus after it sold out of onshore Queensland gas ground that later provided Origin with the state’s best CSG reserves, which are now being developed for export.
In turn, the rise of Queensland’s LNG plants, which saw ConocoPhillips partner with Origin to build the biggest of three plants on Gladstone’s Curtis Island, probably slowed momentum at Poseidon, as Conoco focused on the east coast. Now, cost overruns and doubts about resources in Queensland also fuelled Origin’s bidding to join its CSG partner Conoco at Poseidon, with the pair having decided they will not expand the $US20bn Australia Pacific LNG plant they are building at Gladstone.
Brazil’s Santos Basin, where RBC analyst Andrew Williams says $1.3bn of value lies, is a long way from the CSG fields though.
And that is where investor focus will be as Karoon targets the Kangaroo-2 appraisal well in the September quarter, which Williams says could be transformational.
(20min delay)