Is this Australia's next Woodside?

Oil and gas company secures funding for drilling

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 20, 2012 2:51 pm AEST

Karoon Gas (ASX: KAR) has announced that it has secured funding for the drilling of oil and gas wells in the Santos Basin, 112 kms off the coast of Brazil. Canadian company Pacific Rubiales will take a 35% interest in four of Karoon's exploration blocks with an option to acquire another 35% in a fifth block. In exchange, Pacific Rubiales will pay Karoon US$40 million and fund up to US210 million in drilling wells.

The Santos Basin has already shown that it contains significant amounts of oil and gas. Estimates have suggested the oil fields could contain many billions of barrels of oil equivalent. Just one field, The Lula (previously known as Tupi) is estimated to hold 5 billion barrels of recoverable oil by itself.

Karoon holds five blocks in its own right, totalling a gross area of 865 square kms and 20% of another block. In 2010, Brazilian oil company Petrobras found an oil reserve confirmed to contain 550 million barrels of oil equivalent, just 5 kms North-East of Karoon's blocks.

Drilling is expected to start during the fourth quarter of this year, but wells are not cheap, hence the reason for Karoon to seek a partner to help fund exploration. Each well can cost up to US$100 million, as the oil reserves are located deep, sometimes up to 4 kms below the ocean bed, and are technically very complex to reach and extract.

Karoon also holds interests in exploration permits off the coast of Peru and in the Browse Basin, offshore Western Australia close to Woodside Petroleum's (ASX: WPL) Torosa field. Santos Limited (ASX: STO) is also exploring for oil and gas in the Browse Basin, with its permits surrounded by three different LNG projects (Browse, Ichthys and Prelude).

The next 12 months could make or break Karoon. If its unsuccessful with its Brazilian drilling program, the wells may have to be plugged and abandoned. The company would then need to decide if it was going to raise more capital to drill more wells, or sell off the permits, and concentrate on its other interests. However, if it finds oil or gas, they are likely to be large fields, and we could see Karoon become one of Australia's largest oil and gas companies.

Currently trading around $5.55 and with a market cap of more than $1 billion, investors appear to be pricing in at least one decent discovery.

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Motley Fool writer/analyst Mike King owns shares in Woodside. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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