Get Set For Positive News From Karoon
- Karoon quarterly suggests Browse and Santos projects may be delayed
- Delays are timing issues so not a major problem for DJ Carmichael
- Ratings on Karoon remain positive given upside potential
By Chris Shaw
For Karoon Gas Australia ((KAR)), the key elements of the group's quarterly production report related to timing expectations for future work on both the Browse Basin appraisal program and permits in the Santos Basin in Brazil.
Perth based stockbroker DJ Carmichael notes work at both prospects may be delayed by a few months, pushing both into the first part of 2012 rather than the final quarter of 2011. Given these appear nothing more than timing issues, the broker sees no reason to shift from a Speculative Buy rating on the stock.
The positive view of DJ Carmichael reflects the upside potential of both projects. The second phase Browse drilling program should delineate the commercial potential of the Poseidon field, with further development work now possible after environmental approval was granted in July.
Currently, the field has a 2C (mid case, contingent) resource estimate of 7 trillion cubic feet of gas and completion of the second phase of work should see the project advance to the development phase. The first well to be drilled will be Boreas-1, a large tilted fault block about 5km from the Poseidon-1 fault block.
Karoon is currently looking to farm-out its five Santos Basin permits and DJ Carmichael expects this process will run into 2012. One positive of the delay is a final contract should be announced early next year rather than just a preliminary agreement.
Drilling on the permits is forecast to begin in the second quarter of next year, DJ Carmichael noting new seismic data should support both the farm-out process and drilling work. Drilling in the Santos Basin is likely to be the major value driver for Karoon next year, as the region has a high success rate and the area offers better fast-track monetisation options than do LNG developments.
The pick up in activity is expected to be accompanied by Karoon releasing an updated resource report in the first half of next year. DJ Carmichael expects a material resource upgrade, as the report will include both the Browse drilling program and the new seismic data for the Santos Basin.
Upcoming activity implies positive news flow for Karoon in coming months, DJ Carmichael suggesting the potential of both projects to add value is giving investors an opportunity in the stock. Credit Suisse agreed in an update last week, noting the South American assets had the possibility to deliver some positive news flow in coming months.
While DJ Carmichael is not in the FNArena database its positive view on Karoon is far from an outlier, as the database shows a perfect five-for-five Buy ratings for Karoon. The consensus price target according to the database is $8.90, with targets ranging from $7.65 for Credit Suisse to $10.00 or more for both Citi and Macquarie. DJ Carmichael's rice target for Karoon is $9.66.
Shares in Karoon have moved within trading range of $2.60 to $10.00 over the past year, the current price implying upside of better than 100% relative to the consensus price target of $8.90.