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(ASX: KAR) | KAROON ENERGY LTD

Jan 12, 2024

Sentiment: Sideways

Type of Trade: Speculative

Industry: Oil and Gas

Sector: Energy

Karoon Energy Ltd is an ASX-listed international oil and gas exploration and production company with operations in Brazil and Australia. The company is committed to delivering profits from a high-quality portfolio of oil and gas production assets while emphasising sustainable operations.

Projects

Core production asset: BM-S-40 license (Baúna, Piracaba, and Patola fields) in the southern Santos Basin, offshore Brazil.

  • Acquired from Petrobras SA in 2000 for US$380 million, transforming Karoon from an exploration to a production and development company.
  • FY23: Completed Baúna intervention campaign and Patola oil field development, resulting in a 52% production increase.
  • Neon oil field: 2 control wells drilled, 9% increase in 2C Contingent Resources, and booked Prospective Resources for Neon West.
  • Ongoing assessment for potential Neon development.

Finance

✅ Strong September Quarter Performance: Sales revenue: US$203.9 million (up 66% from the prior quarter).

✅ Production: 2.9MMbbl (69% increase from the prior quarter).

Average oil price: US$81.44/bbl. Note: December quarter may see lighter results due to lower oil prices.

✅ Strong Balance Sheet: The company has recently completed a capital raising of A$94 million in December as well as successfully finalised negotiations for a new US$240 million debt package in November.

US GoM acquisition (US$720 million) funded by US$274 million in debt, US$171 million in cash, and US$300 million in equity raise.

Ongoing Capex requirements will be modest in CY24 (US$40–47 million, excluding appraisal and exploration spend).

✅ FY23 performance also presented record production.

✅ FY23 Underlying net profit after tax (NPAT) increased by 70% to US$145.9 million.

Potential Growth

  • Advancing Growth Strategy:
    • Progressed Neon subsurface geotechnical valuations and feasibility studies.
    • Neon development potential is underway.
  • Acquisition of Who Dat Assets in the Gulf of Mexico:
    • High-margin production assets.
    • Material growth with development and exploration upside for shareholders.

Macroeconomic view of Oil and Gas: 2024 Onwards

The oil and gas sector faces a challenging yet dynamic outlook for 2024 and beyond, characterised by various factors that influence price predictions. Despite the attempt to forecast, it’s crucial to acknowledge the inherent difficulty in achieving precision in these estimations.

2024 Oil Price Overview:

  • Analyst Adjustments: Analysts have tempered their expectations for oil prices in 2024. ICE Brent is projected to hover in the low $80s, while WTI is expected to remain in the low $75s.

Divergent Predictions for 2024:

  • Downward Revisions: EIA and investment banks have revised oil forecasts downward by 5-10% for 2024. However, cautionary signals from the World Bank and Fitch Ratings highlight the potential for an oil price shock, reaching $120/bbl in 2024. This shock is attributed to supply restrictions and regional conflicts, which could impact growth and elevate inflation.

Medium-to-Long-Term Outlook:

  • Changing Dynamics: Anticipation of a decline in fossil fuel demand in the medium-to-long-term is reshaping oil price expectations. The EIA envisions average Brent crude prices at $61/bbl in 2025 and $73/bbl in 2030.

Current Market Sentiment – 2024:

  • Bearish Sentiment: The oil market sentiment remains bearish into 2024 due to the strength in non-OPEC+ supply and a sluggish growth trajectory in global oil demand.

Performance and Forecast Analysis:

  • Price Decline: Despite OPEC+ extending output cuts through 1Q24, oil prices have experienced a substantial decline, hitting six-month lows by early December 2023, with WTI at $68/bbl and Brent at $73/bbl.

Outlook for 2024:

Brent crude futures rose more than 2% toward $78.5 per barrel on Thursday, driven by concerns over shipping security after an armed group attacked an oil tanker in Oman. This incident further escalated fears of a Middle East conflict, given the tanker’s role in the Iran-US sanctions dispute. Furthermore, Libya’s Sharara oilfield ceased production due to political protests, removing 300,000 barrels per day from the market. On 09/01/24, unexpected growth in US crude stockpiles, up 1.3 million barrels to 432.4 million, fuelled worry about demand in the world’s leading oil market.

  • Near-Term Challenges: Analysts foresee challenges in the first half of 2024, marked by a looming surplus at the beginning of the year, attributed to seasonally weaker demand.
  • Second Half Reversal: Optimism emerges for the second half of 2024, with expectations of the market returning to a deficit. This reversal suggests the possibility of prices moving higher.

In conclusion, the oil and gas sector in 2024 is poised for a complex journey, influenced by global economic dynamics, geopolitical events, and production-related decisions. While forecasting provides a directional view, the industry’s inherent unpredictability underscores the need for a cautious and adaptable approach to interpreting oil price predictions in the years ahead. Our view is to enter into high-quality asset companies at a technically discounted price and take advantage of such fluctuations and indecisions in the market.

Technical Analysis

Performance Metrics:

🚩 Over the past 52 weeks, KAR has reflected a 13% decline in value, signaling challenges for long-term investors in the current market conditions.

Short-Term Profit Opportunities:

  • In October, the stock presented a lucrative opportunity for savvy traders, with a potential profit of 25%. This reinforces the idea of trading rather than adopting a long-term investment stance.

Recent Market Movement:

🚩 The stock experienced a significant decline of over 30% in November and December, contrary to most analysts’ predictions of a $3 target.

Cautious Entry Strategy:

  • A prudent and savvy approach was maintained, focusing on entry at technically discounted prices. This strategy was employed, particularly during the FOMO levels observed between August and October.

Technical Indicators:

Bearish RSI Signal: The Relative Strength Index (RSI) is currently showing a bearish trend, indicating a possible reversal in the stock’s direction.

Hypothetical Support: The stock is trading in proximity to its hypothetical support level. A double-bottom formation at this point could signal a strong buying opportunity.

Potential Reversal Indicators: Two potential scenarios include a double bottom formation and a higher low formation. Confirmation of these patterns is awaited.

Technical Discounted Price:

  • According to BGS 20 Strategy, the stock is currently trading at a technically discounted price, reflecting not only short-term trends but also long-term trends. This condition suggests a de-risked entry opportunity based on the technical chart formations.

Overall, the technical analysis underscores the importance of a cautious and tactical approach in the current market environment. The combination of short-term profit opportunities, recent market movements, and technical indicators indicates the potential for strategic trading decisions. The confirmation of reversal patterns and adherence to disciplined entry strategies will be crucial for investors navigating KAR’s technical landscape.

Should I Buy (ASX: KAR) Now?

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The information provided by BG Trading to you does not constitute personal financial product advice. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. BG trading recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance)