Australia | May 07 2013
-Encouraging oil shows at Bilby prospect
-Adds potential to Santos commerciality
-Deeper targets to be tested
By Eva Brocklehurst
Oil and gas explorer Karoon Gas ((KAR)) has announced a discovery at Bilby prospect in the Santos Basin, Brazil. [Nothing to do with Santos, the company] Preliminary signs are encouraging for brokers and a number have de-risked estimates on the discovery, noting the company's success with another well, Kangaroo-1, in the same basin.
Bilby-1 intersected a 200 metre gross hydrocarbon column in the Maastrictian age interval. The section is sand and shale and therefore considerable uncertainty remains regarding the net to gross ratio. Macquarie does point out that there was little commentary on the Eocene intervals which were successful intersected at Kangaroo. Karoon described the primary Eocene target in this part of the basin as poorly developed. The ultimate resource size is also uncertain. Recoverable volume will need to increase from the 60 million barrels pre-drill estimate for secondary targets in this discovery to be commercial on a standalone basis.
Citi notes the major risk to the Bilby oil discovery so far is the quality of the sands, which will determine the flow rates that are achievable and whether it can be commercial. A better assessment of reservoir and oil quality is expected in the next few days. Nevertheless, many are hopeful. The well was optimised for the Eocene and Santonian intervals and BA-Merrill Lynch finds the presence of oil in Maastrictian partly de-risks the migration path to the deeper Santonian prospect. Bilby should reach this target in coming weeks.
Campanian targets are also yet to be tested. The pre-drill resource estimate for this interval was around 50m barrels and Macquarie thinks this may provide further opportunity to add resources at Bilby, underpinning the commerciality of the shallower discovery. Having said that, there has been limited success with Campanian and Santonian targets in both Kangaroo and the, ultimately unsuccessful, Emu well. Given the encouraging results to date at both Kangaroo and now Bilby, Karoon is working towards securing a rig to undertake appraisal drilling. Further appraisal drilling will be required to delineate a commercial resource at Kangaroo and, potentially, Bilby.
Karoon has highly prospective acreage across three major hydrocarbon basins, in Australia, Peru and Brazil. The most significant is the Poseidon gas discovery in the offshore Browse Basin, Western Australia. The company also farmed into the North Carnarvon Basin's WA-482-P last year. Macquarie is concerned that, with a Poseidon farm-down yet to be delivered, it leaves Karoon with a 90% funding interest in the upcoming Grace well. The broker suspects the healthy $228m cash balance could be eroded by year-end.
There is over two billion barrels of un-risked prospective resource in the company's Latin American prospects. This is the key differentiator for Karoon, in Merrills view. The deepening prospect inventory of the portfolio offers multiple exploration targets, thus lowering the risk of failure. Deutsche Bank flags two successes out of three wells – Kangaroo-1 and Bilby-1 – as an outcome well above average global exploration success rates, which are closer to one in five. There is potential for over 100m barrels at Kangaroo and similar prospects are emerging at Bilby so the broker thinks commercial potential is increasingly likely.
Citi observes that Karoon is not optimistic about a flow test. Bilby-1 has been drilled with a high mud-weight to ensure control of the well but this has likely affected the reservoir near the well bore and Karoon intends to mobilise another rig by year end for further appraisal drilling. Upcoming drilling plans are for the Kangaroo-2 appraisal well, Wallaby-1 prospect and now, the Bilby-2 appraisal well.
As with most discoveries like this, brokers are not counting the beans into forecasts just yet. Deutsche Bank has a Buy rating on the stock, joining another four brokers on the FNArena database. Citi has a Hold rating. The consensus target price is $7.52, suggesting 50.3% upside to the last share price. Reflecting the risks, the range of targets is from Citi's $6.03 to Macquarie's $9.00.
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