14 May Karoon CEO targeting 50,000 barrels of oil per day as well as capital returns

Source: The Australian

By: Tansy Harcourt

Karoon Energy chief executive Julian Fowles says the company is targeting 50,000 barrels of oil per day over the next three years, and he is “completely aligned” with chairman Peter Botten as the embattled oil and gas company tries to quell investor concerns over capital returns.

“What I’d like to see is that we are able to maintain a more sustainable position, and that will mean growing that production up to a level around 50,000 barrels a day or so,” said Mr Fowles. “I would like to see that within a reasonable time frame, which would be within three years.”

Karoon is currently producing 35,000 barrels per day, according to Mr Fowles.

The energy company has flown under the radar during almost two decades as a listed explorer, but now that it’s a producer with strong cash flows, activist shareholders want a shift from growth through acquisition to rewarding investors.

Mr Fowles said that the company can do both.

“I don’t think these two are mutually exclusive,” said Mr Fowles. “I don’t think growing to attain a level which we believe is sustainable; nominally I call that 50,000 barrels a day, and as I stress that has to be in value accretive terms, would exclude a sensible capital return policy, and that has always been the objective of Karoon to get to that point.”

Activist investors Sandon Capital and Samuel Terry have called for Karoon to stop making acquisitions after the company’s shares have struggled to recover from a dilutive equity raising last year to fund its Who Dat acquisition in the Gulf of Mexico.

Karoon’s target for an acquisition to be “value accretive” is one with a “mid-teen internal rate of return,” said Mr Fowles.

While some shareholders have opening questioned this strategy, investment bank Barrenjoey has supported the move.

“We continue to like the strategy for Karoon to grow through M&A, and suspect the quality of the Chairman will see a focus on regaining investor trust through commitments to capital discipline and rectifying operational issues prior to further M&A,” wrote Barrenjoey analyst Dale Koenders in a research note to clients.

Market speculation has mounted that Mr Fowles may be losing the support of Chairman Peter Botten, formerly of Oil Search, but Mr Fowles said this is simply “mischief.”

“Peter and I have worked closely together for many, many years and I can assure you, we’re completely aligned. That sounds like mischief.”

As to the question of if and when Karoon will announce a dividend or capital return strategy, Mr Fowles said that would be a matter for the board, but it is expected that the company will announce further details on the timing very soon.

The company’s annual general meeting will be held next week, and Mr Fowles said he did not expect Karoon to announce a dividend then as the company’s accounts are yet to be audited.

However, he said it is likely that it will make public the “metrics” around which the oil and gas producer will start giving back money to shareholders.

“I would not expect that we will be in a position to announce a specific dividend or other capital return at the AGM, but I would expect that we will be able to announce how that would be calculated,” said Mr Fowles.

“It would be looking at things like profitability, things like free cash flow less capex, and it will be looking at that and working out what’s the best metric to choose to enable a policy around sustainable dividends or sustainable capital returns.”

Last week, the embattled oil and gas company sought to ease shareholder concerns about poor capital management, announcing it was “not even close” to buying another asset before admitting a purchase could come by year-end.

Sandon Capital’s Gabriel Radzyminski said that the firm is generating over US$200m of free cash flow on a market cap of $1.5bn and should be paying dividends.

Karoon has two main assets, the Bauna Project in Brazil, and the recently purchased Who Dat.

Sandon and Samuel Terry hold 5.6 per cent of the shares in Karoon combined and will vote against five of the nine resolutions at the AGM being held on May 23.

Mr Fowles admits that he expects this year’s AGM to be a little more rowdy than usual, but added that the major proxies have come out in support of this year’s resolutions.

“Perhaps things will be a little louder at the AGM than they have been in the past. Maybe there will be a few more questions which we haven’t had in the past,” said Mr Fowles. “Our job is to answer questions and if people have got questions I am very happy to answer them and I know the chairman will certainly not shy away from difficult questions.”