Pinned straw:
Riffing somewhat off @Goldfish's thread on “Timing the sale of oil and coal stocks,” as a holder of Karoon this is a pertinent issue for me. As a cyclical, the timing of when to buy and particularly when to sell is critical, unlike with growth companies where time tends to heal timing issues. With the price whipsawing on each Trump tweet, I need to have a well‑founded view on an exit price.
I continued to hold Karoon when it tipped over $2 about a year ago on valuation grounds, and that was at much lower oil prices. However, that was based on the premise that an oil price of around US$60–70/bbl at the time was at the low end of a range. So now that we are over US$100/bbl, why isn’t Karoon over $4 a share, and does that suggest I have missed something, i.e. that it is time to recheck the thesis and valuation assumptions?
What the new short‑ to medium‑term oil price “normal is” remains the ultimate question (welcome, captain obvious). My assumption is that it is above US$60–70 but could be anywhere from US$80–110, given the following factors:
- Iran war: There are three key impacts from the war:
- Supply route blockage: The blocking of the Strait of Hormuz is bottling up roughly 20% of world oil supply, but unblocking is a matter of a decision that could be made at any time. This is therefore a short‑term impact that could disappear as quickly as it appeared.
- Iranian oil “tariff” on the Strait of Hormuz may be how it gets unblocked, which would potentially be a medium‑term impact on prices and would depend on how it is priced and structured.
- Gulf oil/gas infrastructure damage: This is the most significant risk to medium‑ and long‑term oil prices.
- Ukraine attacks on Russian oil (Ukraine Ramps Up Attacks on Russian Oil, Aiming to Curb Iran War Windfall - The New York Times): Russia has probably been the greatest beneficiary of the war in Iran, which is rarely mentioned. Sanctions were eased to increase supply and higher prices are helping to fund the Russian war effort; the oil price probably would have hit US$150, as some predicted, without this extra supply. However, Ukraine is trying to offset that advantage by increasingly targeting Russian oil export lines and infrastructure. As with Iran, blocking a supply line is a problem only until a decision is made to unblock it, but blowing up infrastructure creates a problem that takes years to fix. So the price implications of this look likely to be lasting.
- Global production response: Higher prices will certainly make more wells commercially viable and encourage drilling, but it takes time for this to occur. The Venezuelan oil situation is a good example: plenty of oil, but fixing/building the infrastructure to sell it is going to take time, and presumably many of the skilled people and required equipment are going to be deployed fixing facilities currently being bombed.
- Acceleration to electrification: Another slow‑burn solution that is not going to move the dial in the short term, but one that will now be accelerated and will be more impactful in the medium and long term due to the Iranian war.
So, if oil infrastructure damage is kept to a minimum and the Strait reopens, a price around US$80 will probably be a reasonable expectation for the CY26 average. If the current ceasefire evaporates, the Strait remains blocked, and infrastructure damage ramps up, a price close to US$110 or even more could be on the cards.
Then there are company‑specific factors impacting value: the GoM purchase mistake, operating issues, a new CEO with technical skills, capital management improvements, production vessel ownership, and production output expectations. For the purpose of this exercise, I am going to remain neutral on these factors and assume oil sales/production remains around 10 MMbbl.
Below is a P&L scenario look for FY26 (note YE 31 Dec). I have applied the Brazilian government’s 12% temporary tax on 50% of revenue for the year, assuming it will be extended for the full year, which would see it apply to 75% of Karoon’s current production (ie 25% GoM excluded).
So what to make of it?
FY26 is likely to be a good year and could be a great year. The PE is likely to be below 8 and maybe below 4, but what about further out, which accounts for most of the value? I view the US$80 price scenario and EPS of about A$0.28 as an achievable/conservative medium‑term expectation and a PE of 10 (ie value ~$2.80), which is well above historical averages of 4–8. The PE uplift is based on now having decent management and improved prospects in GoM leading to improve earnings quality, plus a possible upside oil price surprise may offer an exit around ~$3.00.
Just my totally unprofessional view and plan for KAR. I welcome hole‑pokers and other thoughts, any of which may lead to me changing my mind!
Disc: I own RL.
Likely another good day for KAR shareholders today, again courtesy of the orange muppet:
Thank you for the comments in this thread. It has been helpful in trying to work out how to play this situation.
In terms of valuation, I still view KAR as undervalued. But high risk
4 factors IMO have mainly kept a lid on the share price increase, despite the oil price
- Lack of trust in management
- Operational risks
- The poor timing of maintenance (reduced production in the current HY, ramping up in the second half)
- The 12% extra Brazilian tax
In view of the above, I am still planning to sell down my still overweight position. But definitely not everything, given the upside potential that I believe still exists.
Today may well be the moment when the market finally starts pricing in a longer conflict. If so, I will probably sell down another 20% or so
And watch with interest what happens in the next few weeks
Thanks for the post. Good thoughts
I still own a lot of Karoon. Sold down about 20% last week at $2.18. Would have sold more today if there was no deal. Pity that the ASX doesn't trade on Easter Monday like the US does.
KAR has been cheap for a long time. I think we both agree that it still is. If all goes well, there is still major upside. The problem is that operational risks are high and the market has (somewhat justifiably) lost faith in management.
My approach from here depends on what happens in Iran / Strait of Hormuz. If there is no further drama and the oil price drifts down, I will probably hold. But I think a more likely scenario is that there is still more trouble to come. Trump and the Iranians still seem very far apart, there is great potential for the war to flare up again. If that happens, I will look to sell some more KAR (and take advantage again of the cheap prices that will exist outside of the energy sector)
@Goldfish , I reckon that there is a lot of money trading on announcements hoping to get in (or out) early. I don't reckon there is a lot of consideration of fundamentals or reality in the market movements, particularly around oil, at the moment. In the mean time I'm focused on maintaining a 'volatility = opportunity' mindset and trying not to sweat how illogical the movements all seem to be. I'm much the same as you @Arizona but I prefer to consider myself a realist.
