ubs report

Brazil IPO Launched

􀂄 Karoon?s expected IPO price range is US$603m ? US$750m
Karoon Gas Australia has launched its Brazil based initial public offering (IPO) for 31.9% of its South American (SA) assets. Karoon?s expected price range is US$603m - US$750m from the IPO. If the guidance is correct, it implies a value of US$1.89bn to US$2.35bn for 100% of Karoon's SA exploration assets.

􀂄 We think Poseidon is potentially worth A$5.86/share
Our analysis suggests the potential development of a 5 TCF Greater Poseidon gas field to support Darwin LNG T-2 expansion generates a project IRR of 13.5%(including royalty), which results in a value for Poseidon of A$5.86/Karoon share.

􀂄 Action: Buy rating maintained
In our view, recent Karoon share price weakness is largely related to the Karoon Share Purchase Plan (issue price of A$7/share). If we assume the market is valuing Poseidon at 50% of the UBS estimated value, and after adding in the low case US$1.89bn (A$8.92/KAR share at A$/US$0.97) or US$3.21/bbl Brazil IPO value, it equates to a value for Karoon of A$12.93/KAR share.

􀂄 Valuation and price target
Karoon continues to rate as our top Australian mid-cap E&P sector Buy for valuation upside from the potential future commercialisation of Poseidon and for its highly attractive exploration assets. Our price target of A$12.33/share is based on a Poseidon to Darwin LNG T-2 development scenario and a low case US$2/bbl for the Brazil IPO / 32% weighting of Karoon?s risked SA exploration prospects.