Shares of oil and gas explorer, Karoon Gas Australia Limited (ASX: KAR), fell as much as 18% this morning following an exploration update from its flagship Kangaroo West-1 well.
The company's Kangaroo exploration block is located in the Santos Basin, off the south east coast of Brazil. The basin has been home to some significant oil discoveries in years gone by.
Unfortunately Karoon reported that it did not find oil on this occasion. It said, "The lack of hydrocarbons is attributed to a lack of oil migration charge into the structure, previously recognised as the main risk with this prospect. The Kangaroo West-1 exploration well is estimated to cost approximately US$34 million."
The company will now focus its attention on the nearby Echidna prospect, approximately 20 kilometres north-east of Kangaroo.
Should you buy Karoon shares?
As I reported earlier this week, Karoon is an S&P/ASX200 (ASX: XJO) (Index: ^AXJO) oil and gas explorer with a huge amount of cash on its balance sheet ($680 million at 31 December 2014). At today's price of $2.18 per share, its market capitalisation is $525 million.
Whilst you may think investing in Karoon shares is a simple arbitrage profit opportunity, its ongoing exploration activities will likely see its cash balance continue to fall in years ahead.
Moreover, personally, with the backdrop of plunging oil prices, I am concerned that many large oil companies will be unwilling to spend hundreds of millions of dollars developing deep sea production wells. Therefore, even if Karoon does make a discovery, it may not be commercially viable.
In my opinion, Karoon remains a speculative bet.
