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Why Karoon Gas Australia Limited shares have been crushed today

Unfortunately for shareholders of Karoon Gas Australia Limited (ASX: KAR), the oil and gas company has had a terrible start to the week. In early afternoon trade its shares are down a whopping 22% to $1.82, erasing almost all of this year’s gains.

The reason for today’s decline is the shock announcement that court proceedings have been filed against energy giant Petrobras and Brazil’s national petroleum, natural gas, and biofuels agency (ANP). The filings relate to Karoon Gas’ proposed acquisition of two major oil projects.

Karoon Gas’s share price has gone gangbusters since it announced the planned acquisition of a 100% stake in the 45,000 barrel-a-day Bauna field in the Santos Basin and a 50% stake in Tartaruga Verde in the Campos Basin from Petrobras.

It’s not hard to see why either, as the two oil projects would be game changing for the company. But with these acquisitions now in question, investors have run for the exits.

According to the release the court proceedings contend that the sales process didn’t comply with Brazilian regulatory requirements. In light of this an interim injunction has ordered Petrobras and the ANP to cease the sale process.

Karoon Gas has advised that the injunction is not final and is subject to an appeal process which is underway. Management intends to keep the market updated with developments.

If the deal is off it will be a bit of a disaster for the company in my opinion.

Although Karoon Gas has permits for other potentially lucrative operations, this was a proven resource and the jewel in the crown.

If the appeal is successful then I expect the share price will retrace these declines fully, but I certainly wouldn’t recommend gambling on that outcome. For now investors may be better off avoiding oil shares like Karoon Gas and Santos Ltd (ASX: STO) to focus on other areas of the market.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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