Weekly Share Tip: Buy on KAR


Weekly Share Tip: Buy on KAR

Weekly Share Tip: Buy on KAR

Karoon Gas Australia (KAR) is focused on identifying, exploring and developing acreage that is highly prospective for oil and gas.

The company currently has three focus areas – the Browse Basin (Western Australia), Tumbes Basin (Peru) and the Santos Basin (Brazil).

Santos Basin

KAR has a 100% equity interest in five oil blocks in the Santos Basin, offshore Santa Catarina in Brazil.

The Basin has a history of oil discoveries, and importantly, KAR anticipates that new fields within its acreage can quickly be brought to production due to relatively shallow water depths and their proximity to existing infrastructure.

A three-well drilling campaign will begin later this year, and KAR is currently in the process of farming out some of its equity interest. KAR expects to complete the farm-outs in the coming quarter.

A farm-out will not only help fund KAR’s drilling campaign, but the strong interest it is receiving from prospective farm-in partners appears to validate the significant production potential of the block.

Browse Basin

KAR’s Browse Basin drilling campaign holds long-term promise for the group, this despite a year of contending with regulatory and operational delays.

KAR’s joint venture partner is ConocoPhillips, which holds a 60% stake in the project and is its operator.

The drilling campaign, likely to start this month, will see five to eight wells drilled initially.

The campaign will attempt to define the size of the resource, but pre-drill estimates of proven reserves (P-90) are 3 trillion cubic feet of gas.

Although funding risk is always a concern with gas explorers, KAR had $266.6 million at the end of the December quarter.

When factoring in the proceeds from likely farm-outs of its various projects, KAR expects to have sufficient capital to complete all drilling activities.

This implies a very low likelihood of KAR having to sell down more equity in the Browse Basin Project and/or announce a capital raising.

Outlook

KAR has emerged as an exciting oil and gas explorer, with several promising drilling campaigns about to get underway.

The group is sufficiently funded to complete its Browse Basin drilling campaign, and there is hope the drilling will lead to a sizable defined resource in the near future.

Regarding its South American operations, KAR anticipates reaching a farm-out agreement in the coming quarter.

This will not only improve its cash position but pave the way for the commencement of its Santos Basin drilling campaign.

We expect KAR to be a stock to watch in 2012, and see further upside for its share price.

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