Disregard what you might read and hear about fossil fuels: we are going to need them for a long time to come – that is, if people expect society to function in the manner to which they’re accustomed. Vilified as they might be in some quarters as planet-wreckers, oil and gas companies are still working to supply the world with its essential fuel: putting up the capital required to find, develop and bring to market hydrocarbon discoveries. Here are four of what I think are highly attractive oil and gas opportunities on the ASX.
- Karoon Energy (KAR, $2.08)
Market capitalisation: $1.2 billion
12-month total return: –1.4
3-year total return: 68.5% a year
Analysts’ consensus price target: $2.85 (Stock Doctor/Thomson Reuters, eight analysts), $3.16 (FN Arena, three analysts)
Explorer and producer Karoon Energy has assets in Brazil and Australia, with the main producing asset being the Baúna oil field in the southern Santos Basin, offshore Brazil. Karoon bought – and took over operatorship of – Baúna from Petrobras SA in November 2020, paying US$380 million, plus additional oil price-related contingent payments of up to US$285 million.
Brazil has transformed Karoon. From when Karoon acquired and assumed ownership of Baúna, through to 31 December 2022, the field has produced 11.2 million barrels of oil (MMbbl) and generated cash proceeds from oil sales of US$798 million in cash revenue, net to Karoon. And since it took over the field, Karoon has replaced production 2.6 times.
The first half of FY23 saw production increase by 35%, to 3.37 million barrels a day (MMbbl), with underlying net profit up 275%, to US$82.4 million, on an average realised oil price of US$87.86 a barrel. That leaves full-year FY23 guidance for a production total of 7.5 MMbbl–9 MMbbl, twice Karoon’s production rate compared to FY22.
The stable Baúna cash flows saw a net US$144 million generated in the half-year, which funded growth investments and capital expenditure.
The next step for Karoon is developing the Patola oil field, located adjacent to Baúna. The Patola development, scheduled to come onstream late this year, is expected to add an initial 10,000 barrels of oil a day, boosting total production from 21,500 barrels a day to 30,000 barrels.
Then there is the Neon field, to the west of Baúna, where the Neon-1 well in February confirmed the presence of primary reservoir targets: it will shortly be followed by Neon-2. Both wells are designed to provide better understanding of potentially recoverable volumes and delineate pathways of future production wells.
Karoon is well-funded for what it needs to do. At 31 December 2022, Karoon had cash and cash equivalents of US$163.2 million, with undrawn debt of US$180 million, giving “total liquidity” of US$343.2 million ($520 million).
With Patola and then Neon coming onstream as Baúna enters decline, analysts think that Karoon has plenty of share price upside in coming years.
- Omega Oil & Gas (OMA, 17 cents)
Market capitalisation: $49 million
12-month return: n/a (listed October 2022)
Analysts’ consensus price target: n/a
Omega Oil & Gas listed on the ASX in October 2022 at 20 cents a share, after having assembled a strong portfolio of gas and oil assets in the Surat and Bowen Basins, onshore in South-East Queensland. The company holds more than 250,000 acres of ground, in prime location – only about 50 kilometres from existing gas infrastructure and pipelines that feed into the Australian East Coast gas market, through the Wallumbilla Gas Hub, and also gives easy access to the international market, through the Gladstone LNG export terminal.
The company’s exploration permits and petroleum leases host an independent prospective resource of 3 trillion cubic feet (TCF) of gas and 233 million barrels (MMbbl) of associated liquids.
One of the assets, the PL 17 oil field, was discovered by Union Oil in the 1960s and oil has flowed for most of the time since, from the Bennett oilfield within PL17, but it was shut in March 2019 because of low oil prices. Omega reinstated production from Bennett in the December 2022 quarter, which brings welcome cash flow to the company, and Omega has also done some work that indicates further potential oil upside: this work is ongoing, and the company expects to lift production from Bennett in 2023. But PL 17 is not the main game for Omega.
What is the main game is unlocking the potentially huge value in Permian (the geological period) Deep Gas assets beneath historical coal seam gas (CSG) targets – specifically tight gas-bearing sandstones within the Permian Kianga Formation. Omega holds two highly prospective exploration permits – ATP2037 and ATP2038 – that form the Canyon field, where it plans to drill two vertical exploration wells planned to test the play, at depths of up to 4,000 metres. The Canyon drilling campaign is expected to be completed by the end of April.
The geology of the target area is very similar to CSG fields that turned out to be very prolific, including Santos’ Fairview and Arcadia gas fields and Origin Energy’s Spring Gully gas field, but it is located at significantly deeper depths. However, it is a multi-trillion-cubic-feet (Tcf) opportunity.
Omega is working in a strategic partnership with US family-owned resources exploration company Tri-Star, which invested $4.9 million in Omega post-float, at the float price of 20 cents – at the time, a premium to the market price – for a 10% stake. Tri-Star has been involved in Australia for more than 40 years, working in major exploration and development and production across Queensland, South Australia, the Northern Territory, and the Permian Basin in Texas. As part of the investment, Andrew Hackwood, Tri-Star’s Australian head, joined Omega’s Board, bringing his expertise in all aspects of the east coast gas market. Tri-Star is the ideal partner for Omega, with huge geological, technical and commercial expertise in the field: it drilled Queensland’s first commercial CSG well and has discovered some of the world’s best CSG fields.
With an entry point below the float price, Omega looks a very attractive opportunity, with PL17 oil reserves to be updated in 2023 plus the more important news to come from the Canyon drills.
- Talon Energy (TPD, 15 cents)
Market capitalisation: $79 million
12-month total return: –11.8%
3-year total return: 95.7% a year
Analysts’ consensus price target: n/a
- Strike Energy (STX, 39.5 cents)
Market capitalisation: $992 million
12-month total return: 31.7%
3-year total return: 50.9% a year
Analysts’ consensus price target: 44.5 cents (Stock Doctor/Thomson Reuters, four analysts)
Over in Western Australia, Talon Energy and Strike Energy hold the Walyering gas prospect, which, after several years of exploration and flow testing, the partners expect to start selling gas into the West Australian market in the first half of 2023. The Walyering acreage, part of the Perth Basin, is situated close to the Parmelia gas pipeline, which serves industrial customers in the Perth metropolitan area.
The first exploration drilling at Walyering was done in 1971, but the first four wells over the next three decades failed to show much. Strike Energy picked up the ground in 2018 and in 2020, brought in Talon as a 45% partner in a joint venture (Strike is the project operator). The partners had the benefit of three-dimensional seismic imagery, which improved their ability to map the field, and in November 2021, the Walyering-5 exploration well was drilled. It hit several gas reservoirs, and the follow-up well, Walyering-6, drilled in May 2022, made another gas discovery. Strike and Talon started working toward development of the field and pressed the ‘go’ button in August 2022.
The Walyering discovery is known as Jurassic wet gas, meaning it will also yield associated condensate (a light oil) along with the gas. Condensate is considered a premium product compared to crude oil, and usually sells at a premium.
Subject to final regulatory approvals, the partners are aiming to produce first gas from Walyering by June. Talon recently raised $12 million in a share placement to fund its share of spending at Walyering. The joint venture has signed a deal with Santos, the biggest supplier of gas used within WA, to supply 36.5 petajoules of gas from their field over the next five years, starting in the first half of 2023. Given that the Australian Energy Market Operator (AEMO) forecasts that demand for gas in Western Australia will outstrip supply between 2023 and 2026, that is a very nice position for Walyering gas to be in.
Talon has another Jurassic wet gas prospect in the Perth Basin; the Condor prospect, which it wholly owns: this has a potential gas reserve of 408 billion cubic feet of natural gas, and, 20 million barrels of condensate liquids. What Talon learns from Walyering will be very handy when it comes to developing Condor.
Talon is also a 25% partner in a joint venture looking at the Kingia gas prospects in the northern part of the Perth Basin.
Also, in the background, Talon is a 33% partner with TMK Energy (ASX code: TMK) in the promising Gurvantes XXXV CSG project in the South Gobi region of Mongolia. The field is located close to the large and hungry gas market in China, and could be a lucrative asset; but at this stage, Talon is doing a strategic review to work out what is the best way to generate value from it for its shareholders. That could result in a spin-off or a sale.
Both of the JV partners look to be attractive punts, based on Walyering gas coming into the market soon. And Talon appears to have a nice bit of blue-sky potential beyond that.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
