Commodities | 10:00 AM
Following a strong final quarter in 2025, Karoon Energy faces a challenging, investment-heavy 2026 under a new CEO amidst a tough oil market.
- Karoon Energy enjoys strong December quarter
- Investment ramps up in 2026, leading to negative free cash flow
- Farm-down discussions at Neon appear to have slowed
- Brazil exploration provides potential upside catalyst
By Greg Peel
Karoon Energy ((KAR)) delivered a strong December quarter result versus consensus, featuring sales revenue beating consensus by 9%. The 'beat' was underpinned by stronger-than-anticipated sales volumes from Bauna and robust liquids production from Who Dat.
Quarter on quarter sales revenue did decline by -5% due to weaker global oil prices, with Karoon realising an average oil price of US$61.53/bbl from Bauna, down -10% quarter on quarter.
Preliminary 2026 production guidance of 8.1-9.2mmboe is down -16% year on year at the mid-point, with consensus (9.1mmboe) at the top end of the range.
The decline reflects natural field decline, a 28-day planned Bauna FPSO (floating production storage and offloading) shutdown, and potential minor disruptions from a four-month flotel-supported revitalisation campaign.
Capex guidance appears well below consensus but guidance excludes flotel costs, one-off FPSO transition costs, and office relocation costs.
Jarden’s focus was the release on 2026 production and cost guidance, which, after analysis, was determined to be overall positive going into the quarterly update.
While consensus estimates were towards the upper end of the guidance range, Karoon's recent track record of setting conservative targets should ease fears, in Jarden’s view.
Heavy Investment Year
2026 will be execution-heavy for Karoon in the first half, dominated by planned downtime at Bauna before a clearer re-rating pathway opens into the second half as reliability improves and multiple catalysts play out, Citi notes.
The upcoming revitalisation and flotel campaign represents the first major operational challenge under the new CEO, but, if delivered well, should translate into structurally higher uptime, lower unit costs, and greater operational control, Citi believes.
Macquarie notes the heavy investment year will result in negative free cash flow.
Karoon has been conducting a farm-out process for a 30-40% stake in Neon/Goia as a standalone FPSO redeployment. Macquarie was surprised to see commentary management is considering alternate development concepts (the FPSO market will have become more challenging, and Karoon now acknowledges the lower oil price outlook).
Macquarie has lowered the value attributed to Neon at this point in time to 4c/share from 19c/share.
Jarden agrees farm-down discussions at Neon seemed to have slowed –-potentially a victim of the lower prevailing oil price environment-– with a decision on next steps now expected in the first half rather than the first quarter. Jarden’s valuation includes 14c/share for Neon (on a 25% risk-weighting) but this broker thinks the project pace may slip further until oil prices improve.
Jarden anticipates Karoon will outline its view of the exploration potential at its full year results on 26 February.
At Who Dat, Karoon is mitigating natural decline through sidetrack wells. The E6ST well came online in mid-November at approximately 1,050 boepd (barrels of oil equivalent per day) in line with expectations and delivered below budget.
Technical studies are underway for the A1ST sidetrack, with drilling targeted for the June quarter subject to joint venture approval.
Potential Catalysts
While highlighting the upcoming challenges, in parallel Citi sees a number of value-unlocking catalysts that risk being overlooked during this execution period, including a potential partial farm-down of Neon (maybe), a final investment decision at Who Dat East, and farm-in interest across the company’s deepwater exploration blocks.
Macquarie points out after securing sizeable 100% owned/operated acreage, Karoon continues technical work on its new deepwater tertiary oil play in Brazil’s Santos Basin, to delineate and risk a suite of prospects and leads for volumetric and economic analysis (untested and potentially material).
This farm-out becomes a key potential catalyst for Karoon shares, Macquarie suggests, targeted in the first half 2026.
On the other hand, in acknowledging that current economic and market conditions are strained, the Karoon board is now actively re-assessing its buyback program based on anticipated reduced free cash flow from lower oil prices, RBC Capital notes.
To date, Karoon has acquired 82.5m shares (approximately 10% of shares on issue) across phases one and two of the US$75m program.
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