Commodities | 10:59 AM
Karoon Energy's troubled Who Dat operation has suffered another setback, triggering a sharp production downgrade. Analysts believe substantial value remains if asset reliability can be restored.
- Karoon Energy’s Who Dat oil field delivers another setback
- Shares fall on downgraded 2026 production guidance
- Management’s remediation plan to recover lost production
- Macquarie sees more downside if/when Strait of Hormuz clears
By Mark Woodruff
In November 2023, the Who Dat oil field became Karoon Energy’s ((KAR)) entry point into the US Gulf Coast and one of its two core producing regions alongside the Bauna field in Brazil.
The oil and gas producer's investment in the Who Dat hub includes a 30% working interest in the producing Who Dat field (offshore Louisiana), a 30% stake in the associated floating production system, and interests in surrounding development and exploration acreage.
The deal was initially controversial among some shareholders because of the sizeable equity raising used to fund the acquisition.
Activist investors argued Karoon should prioritise dividends and capital returns rather than acquisitions, while management maintained Who Dat would underpin future growth and cash generation.
Unfortunately, since acquisition the project has faced production interruptions, maintenance outages, hurricane-related disruptions and cost inflation, while development and exploration opportunities have taken longer than expected to contribute.
Morgans notes the recurring issue at Who Dat has been asset reliability and infrastructure integrity rather than reservoir performance.
Initial challenges centred on topside constraints, while more recent setbacks have involved subsea infrastructure.
Morgans observes, across both Who Dat and Bauna, "pretty much all that could go wrong has" since Karoon acquired its stake.
Another Interruption
After briefly rallying above $2.50 following completion of the Who Dat acquisition, Karoon's shares spent most of their time fluctuating between $1.50 and $2, before the latest disappointing operational update from the oil field triggered a sharp sell-off, sending the stock to around $1.45.
Morgans explains the latest setback at Who Dat involves a failed E-Manifold riser, connecting the subsea well to the production facility.
US-based operator LLOG warned the issue is more complex than initially anticipated, with only limited production now expected to be restored from the second half of 2027, subject to further laboratory analysis.
Consequently, management cut 2026 group production guidance to 7.2mmboe-8.2mmboe net revenue interest (NRI), a fall of -11% at the midpoint of the range, after Who Dat 2026 production guidance was slashed to 1.2mmboe-1.5mmboe from 2.1mmboe-2.5mmboe.
NRI represents the percentage of production and revenue attributable to Karoon after accounting for royalties and other ownership interests.
Macquarie sees further downside risk if tanker traffic through the Strait of Hormuz normalises and Karoon's operational challenges were to persist into 2027.
Based on production forecasts for Who Dat and Bauna of 1.3mmboe and 6.2mmboe, respectively, RBC Capital now estimates 7.5mmboe for 2026, down from 8.3mmboe prior.
Who Dat Versus Bauna
As Morgans notes, at around 15 years old, the Who Dat field is not particularly mature by Gulf of Mexico standards, though the emergence of integrity issues such as the riser failure is not unexpected.
While a remediation plan is being implemented to recover lost production, Ord Minnett observes the restart has now been pushed back to the first half of 2027 from earlier expectations of a mid-2026 resumption.
2026 guidance for the Bauna project was maintained.
Macquarie notes Karoon incurred additional costs associated with reinstating the SPS-92 well at Bauna, reflecting mechanical issues and weather-related delays, including higher rig costs, although the work is expected to be completed shortly.
The broker highlights the PRA-2 intervention is scheduled to come online early in the September quarter.
SPS-92 and PRA-2 are expected to add 9-10kb/d of production, the vast majority from SPS-92.
Management believes both wells will be online around mid-year, implying to RBC the bulk of the intervention work has now been completed.
Meanwhile, the transition to a new Floating Production, Storage and Offloading (FPSO) operator was completed successfully on May 27.
Investment Expenditure Review
Management is reviewing its 2026 capital expenditure budget to optimise spending, balancing a roughly -25% reduction in production at the midpoint of revised guidance against stronger-than-expected oil prices.
RBC maintains 2026 full-year capex will likely come out at the top end of guidance.
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