Is Karoon Gas Australia Limited about to shoot sky high?

8 out of 9 analysts have a buy or outperform on this stock – could they be wrong?

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In June 2012, every single investment analyst that covered Karoon Gas Australia Ltd (ASX: KAR) had a buy on the oil and gas explorer. With the share price falling more than 40% since then, have those 10 analysts got it wrong?

It certainly seems that at least one of them has given up hope, but 8 out of 9 analysts have a buy or outperform recommendation on Karoon Gas, according to Reuters.

It’s hard to work out why to be honest. It seems more like hope, desperation and an unwillingness to deviate from the crowd.

Karoon has yet to generate one dollar of operating revenues, despite raising $600 million in equity over many years. The company’s cash balance is slowly dwindling and Karoon was forced into a capital raising for $175.5 million in August 2013.

Given the disappointing results Karoon has delivered over many years, many investors must be at the end of their tether. It doesn’t help that broker analysts keep flogging a dead horse.

So what is it that keeps analysts being positive about Karoon? Is it the possibility that this oil and gas play could be bigger than Ben Hur?

The main reason appears to be that Karoon owns a number of exploration blocks in the Santos Basin, offshore Brazil. Massive oil and gas fields worth billions of dollars have been found in the region, and just one successful well drilled could see Karoon worth multiples of its existing $624m market cap.

Karoon has also had some success with its Proteus-1 well in the Browse Basin, offshore Western Australia, after it discovered gas in 2013, but a subsequent well was plugged and abandoned. More drilling is being undertaken to define the size and quality of the contingent gas resource base.

But a sign that Karoon knows it is struggling was the decision to hire two investment banks to manage a farm-out process for two permits in the Browse Basin and five blocks in the Santos Basin. In other words, Karoon is trying to find a partner or partners to cough up some cash for a stake, so it can keep those permits and keep drilling.

Foolish takeaway

At the end of the day, an investment in Karoon is nothing but speculation. Whether or not it can develop a commercially viable operation remains to be seen, but its unlikely to soar anytime soon.

Investors wanting exposure to the oil and gas sector have plenty of choice in other companies that are already generating revenues such as Woodside Petroleum Limited (ASX: WPL), Santos Limited (ASX: STO), Oil Search Limited (ASX: OSH) and even BHP Billiton Limited (ASX: BHP).

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Motley Fool writer/analyst Mike King owns shares in Santos. You can follow Mike on Twitter @TMFKinga

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