The energy sector is chalking up another day of gains as the outlook brightens for the oil price and a leading broker is urging you to buy this ASX share today.
The Brent crude benchmark has jumped by nearly 10% in two weeks from a low of US$65.11 to over US$70 a barrel.
ASX shares linked to the oil price have joined the party and most continued to rally today.
Broker lists one ASX energy share to buy
The Viva Energy Group Ltd (ASX: VEA) share price added 2.2% to $2.10, Oil Search Ltd (ASX: OSH) share price jumped 2% to $4.11 and Worley Ltd (ASX: WOR) share price gained 1% to $12.17.
But there's one often overlooked ASX share that should be on your radar. This is the Karoon Energy Ltd (ASX: KSR) share price as Morgans reiterated its "add" recommendation on the stock.
The broker's bullish call follows Karoon reaching a final investment decision (FID) on its Patola oil field.
Karoon production to double
"Given the high IRR (24%) and fast payback period (~3 years), we never saw much risk of Patola not reaching FID," said Morgans.
"But the development should bolster market confidence in what we see as a low-risk/high-return organic growth profile that will double KAR's current production."
Karoon's current production stands at around 12,500 barrels of oil equivalent per day (bopd). Management is expecting to produce 10,000 bopd from Patola starting from the March quarter of 2023.
Higher costs offset by other tailwinds
But it isn't all good news. The capital expenditure (capex) on the project is higher than originally forecast. Bringing Patola into production is expected to cost US$175 million to US$195 million. That's ahead of initial estimates of US$130 million.
"More than offsetting the higher capex was the debt KAR has secured," said Morgans.
"Both larger (actual US$160m vs MorgE US$100m) and cheaper (actual 4.25% vs MorgE 5.5%) than we had expected KAR to be able to achieve. This is material for KAR's cost of capital, which we have now adjusted lower."
Karoon share price valuation uplift
The lower cost of debt means that the broker's weighted average cost of capital (WACC) for the Karoon falls to 8% from 9.5%.
The lower the WACC, the higher the valuation on the Karoon share price. Additionally, the reduction in the expected Patola decline rate is a further boost to valuation.
These two positives more than offsets the higher-than-expected capex for the project.
Morgans increased its 12-month price target on the Karoon share price to $1.90 from $1.80 a share.
This implies a close to 40% upside for the shares.
