05 May Karoon Energy under pressure to increase payout

Source: The Australian

By: Bridget Carter

Macquarie analysts believe the Peter Botten-chaired Karoon Energy will likely put forward a payout ratio of about 30 per cent of its net profit on the back of shareholder activism, which could support a rerating of the stock.

Samuel Terry Asset Management and Sandon Capital have amassed 5.6 per cent of the company and are expected to further increase their stake in the $1.5bn Karoon Energy ahead of its May 23 annual general meeting as they agitate for change to the group’s dividend payout policy.

However, the analysts believe that the recent activist investor demands were bullish for Karoon shares, and the company needed to clarify its acquisition intent.

“It is difficult to discern how much of the market’s concern with Karoon doing more deals is reality versus market communication.”

Regardless, they said the activism – gaining some support – was likely to slow down its acquisition plans in their view.

For instance, Karoon was more likely to get its Who Dat exploration project in the US Gulf of Mexico fully integrated and stabilised first, including the three exploration wells.

The AGM would provide an opportunity to offer some clarity.

However, Karoon was attending the Macquarie Australia Conference in Sydney this week and may update shareholders there.

Analysts were now factoring in a base case of a US7c per share (10c to 11c per share) dividend for the 2024 year and a 30 per cent payout ratio in the future.

“This strikes a balance between rewarding investors and reinvesting in growth,” analysts said.

The understanding in the market is that Samuel Terry is lobbying for a payout closer to 40c to 50c per share, which some question the sustainability of the move for the company’s future.

Karoon, chaired by the former Oil Search boss, is an Australian oil and gas producer with offshore operations in Brazil’s Santos Basin and the Gulf of Mexico off the coast of the United States.

For most of its 20 years as a listed company, Karoon was focused on exploration and in recent years, the acquisition of the Bauna project off Brazil’s coast has turned it into a fully-fledged oil and gas producer.

Karoon tapped the market for $480m last year at $2.05 a share to fund the acquisition off the Who Dat and Dome Patrol oil and gas fields off the Gulf of Mexico.

The raising consisted of a $170m placement and a $310m institutional and retail rights offer with shares sold at $2.05 each, a 14.6 per cent discount to the last closing price of $2.40.

The Australian-listed Karoon said that it would outlay $US720m ($1.15bn) for the assets, taking its debt level to 14 per cent and would use $US274m to fund the deal and existing cash of $US171m.

Sandon Capital, which first bought shares in 2020, says that Karoon’s shares trade at a substantial discount to its listed Australian peers which pay regular dividends, and it believes that the valuation gap would narrow considerably if Karoon were to allocate free cashflow from its producing assets to regular dividend payments.

It plans to vote against Peter Turnbull’s re-election because he had been on the board since 2014, and would also vote against increasing fees for directors.

Sandon said the board’s past statements about the possibility of dividend payments had been expunged, replaced by the “more vaguely-defined consideration of capital management”.

It’s not the first time Samuel Terry has agitated for change within an Australian energy company.

The boutique investment manager previously amassed a 20 per cent stake in the Australian-listed Horizon Oil, gained a board seat and changed the management strategy to make it pay more dividends – and as a result its share price has increased.