Karoon Takeover Looming With Brazil Oil Bonanza: Real M&A

The prospect of new oil discoveries in the same region that yielded the Western Hemisphere’s biggest find in three decades is transforming Karoon Gas Australia Ltd. into a takeover target.

Exploring in Brazil’s Santos Basin, in waters south of Sao Paulo, Karoon may be sitting on almost 1 billion barrels of oil. Together with fields in Peru, these untapped South American assets alone are worth $1.6 billion, 35 percent more than Karoon’s market value yesterday, said Macquarie Group Ltd. No peer in the developed Asia-Pacific region is projected to gain value faster, as analysts estimate Karoon will trade 61 percent higher in 12 months, according to data compiled by Bloomberg.

After its shares more than halved from their 2009 peak, Mt. Martha, Victoria-based Karoon ranks among Australia’s top takeover targets in 2013 because of the potential for profitable oil and gas discoveries off Western Australia and Brazil, said Citigroup Inc., which named BG Group Plc and Petroleo Brasileiro SA as possible suitors. While Bell Potter Securities Ltd. says any bidder will wait for the outcome of drilling in Brazil, the company said it expects to report initial results from the first of three wells by the end of March.

“The Brazilian exploration is very, very speculative but could be incredibly lucrative,” Gaurav Sodhi, an analyst at Sydney-based The Intelligent Investor, said in a telephone interview. “If that ends up being successful, then Karoon is far too small a company to develop those fields.”

Lula Site

Founded in 2003 by former steel industry executive Robert Hosking, Karoon sold shares in its initial public offering the following year. Already exploring for gas in Australia, Karoon said in late 2007 that it acquired five offshore exploration blocks in the Santos Basin.

“Karoon is in the middle of a drilling program, and it won’t be until we have success or not that that becomes a factor,” Scott Hosking, the company’s chief financial officer, said in a phone interview when asked about the potential for a takeover.

The Santos Basin is also home to Lula, a field discovered in 2006 that was at the time the largest crude find in the Americas since Mexico’s Cantarell in 1976. Explorers in the basin include Petrobras, Brazil’s state-run oil company; U.K. gas producer BG and Madrid-based Repsol SA.

“The South American assets are the jewel in their crown, and what’s likely to be the company-maker,” Kirit Hira, a Sydney-based analyst at Macquarie, said in a phone interview. Hira values that part of Karoon’s business at A$7 a share, accounting for most of his price target of A$10 a share.

Potential Resources

Karoon rose 1.2 percent, the second-biggest gain among oil and gas explorers on Australia’s S&P/ASX 200 Energy Index, to A$5.26 in Sydney today. With its shares 55 percent below its July 2009 peak of A$11.82, the company has a market value of A$1.2 billion ($1.3 billion).

The company last September agreed to sell 35 percent of the Santos Basin blocks to Pacific Rubiales Energy Corp., which operates Colombia’s largest oil field, for $40 million in cash and as much as $210 million of exploration costs.

Later that month, Karoon said its share of the Brazilian fields, which lie in shallower waters than Lula, may total 942 million barrels of oil. Adjusted to reflect the chance of successfully developing the discovery, a more conservative estimate may be 246 million barrels, the company said, citing analysis by Dallas-based consultants DeGolyer and MacNaughton.

By contrast, the Piracuca discovery, about 5 kilometers east of Karoon’s blocks in the basin and at a similar depth, has estimated reserves of 550 million barrels of oil, Petrobras said in 2009.

Cheap Exposure

Karoon is also evaluating the size of the Poseidon natural gas discovery off northwest Australia with ConocoPhillips. That may hold 3 trillion to 15 trillion cubic feet of gas, according to company estimates. Six trillion cubic feet of gas is equivalent to 1 billion barrels of oil.

In addition, Karoon plans to find a partner for its Peruvian assets and drilling is expected to begin later this year.

The undeveloped assets offer “early-stage, cheap exposure to massive gas potential,” Citigroup’s hedge fund sales desk said in a Dec. 17 report, which named Karoon among 19 Australian takeover targets for 2013.

On average, eight analysts who cover the company expect the stock price to reach A$8.36 within 12 months, implying a potential return of 61 percent from yesterday’s close, estimates compiled by Bloomberg show. That’s the best of 21 oil and gas explorers with market values of more than $500 million in the developed Asia Pacific region, the data show.

Sinopec, Petrobras

In its report, Citigroup said likely buyers for Karoon include Petrobras, Karoon’s partner in another Santos Basin field, and BG, which has said it will invest further in Brazil. Jarrod Bakker, the bank’s Sydney-based director of hedge fund sales, declined to comment beyond the report.

Petrobras is selling assets and cutting costs as it invests $236 billion between 2012 and 2016, most of it on exploration and production. Karoon’s deal in 2010 to acquire 20 percent of the Maruja block from Petrobras still needs regulatory approval, Karoon said in December.

BG, which said this week it started producing oil at one of the “Big Five” discoveries in the basin, plans to invest $30 billion in Brazil, where it expects to pump about a third of its worldwide output by 2020.

Petrobras, based in Rio de Janeiro, declined to comment, according to an e-mailed response from the company’s press office. Neil Burrows, a spokesman for Reading, England-based BG, also wouldn’t comment on takeover speculation.

Drilling Results

Beyond Petrobras and BG, potential buyers also include China Petroleum & Chemical Corp., known as Sinopec, Citigroup said. Analysts -- including Mirae Asset Securities in August -- have said the Chinese company must purchase assets to help its parent meet a target of more than doubling overseas crude output by 2015.

Lv Dapeng, Sinopec’s Beijing-based spokesman, did not answer calls seeking comment.

The South American assets trump the Browse Basin as the biggest attraction to an acquirer because of the cost of developing projects in Australia, said Johan Hedstrom, a Sydney-based analyst at Bell Potter. Any buyer will wait for drilling results before bidding, he said.

“A good discovery tells you a lot about itself very quickly,” Hedstrom said in a phone interview. “If it looks like a good discovery, you can jump to some conclusion about the commercial value of that.”

Potential buyers may have already looked at Karoon’s South American assets when the explorer was searching for a Brazilian partner, said Hira, the analyst at Macquarie. Suitors are more likely to seek a partnership than buy the company, he said.

Takeover Odds

“If they were interested in a corporate-level deal, we would have seen a deal done” before the Pacific Rubiales transaction, Hira said.

Still, success will likely attract bids, said Edwin Bulseco, a Perth-based analyst at DJ Carmichael Pty. He estimates Karoon’s stock price will reach A$9.60 within the next year.

“The probability of a takeover would significantly increase on the back of a successful appraisal of Poseidon and success in the Santos Basin,” Bulseco said in a phone interview.

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