Why this ASX 200 energy stock could rise 35%

Goldman Sachs thinks recent weakness has created a buying opportunity.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Karoon Energy Ltd (ASX: KAR) shares took a bit of a hit on Tuesday.

The ASX 200 energy stock's shares fell as much as 8% to a 52-week low of $1.71 before settling the day at $1.79.

Investors were hitting the sell button after the company downgraded its production guidance following complications with the FPSO Cidade de Itajai's gas injection dehydration unit.

While this decline is disappointing, Goldman Sachs believes it is a buying opportunity for investors and is tipping big returns.

An oil worker on a tablet with an oil rig in the background.

Image source: Getty Images

What is Goldman saying about this ASX 200 energy stock?

According to the note, the broker has revised its earnings estimates to reflect Karoon Energy's lower oil production in Brazil.

And while this has led the broker to trim its valuation, it doesn't make an investment any less attractive according to Goldman.

Its analysts have retained their buy rating with a $2.41 price target, which implies potential upside of 35% for investors over the next 12 months.

Three reasons to buy

Goldman has laid out three reasons why it thinks investors should be buying this ASX 200 energy stock. The first is its attractive valuation. It said:

KAR is trading at a ~25% discount to our risked NAV following recent oil price weakness and concern over Brazilian production challenges, which we feel does not reflect the value of existing producing assets and the potential Neon development, where our unrisked NAV including 100% of Neon is A$3.37/sh.

In addition, the broker highlights the strong free cash flow (FCF) it is expected to generate. It adds:

Trading on a ~25% FCF yield over the next 12 months supported by our expectations for oil prices to remain elevated over the near term, where KAR offers unique exposure to oil prices within the Australian Energy sector. We expect KAR's cash flow could support debt repayments, organic growth developments, potential acquisitions or future returns.

Finally, Goldman also sees scope for its resource to increase meaningfully. It said:

KAR are participating in an exploration program over 2024 targeting prospects around the recently acquired Who Dat field which could present low cost tieback opportunities, in addition to the Neon discovery in Brazil which is not priced in.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Energy Shares

A man sitting at his desktop computer leans forward onto his elbows and yawns while he rubs his eyes as though he is very tired.
Energy Shares

Why are Boss Energy shares crashing 14% today?

It was a tough quarter for this uranium producer.

Read more »

Coal miner standing in a coal mine.
Energy Shares

ASX 200 coal stock higher on US$2.4 billion deal

The company has agreed to pay up to US$2.4 billion for an 80% stake in a major coal mine.

Read more »

Excited group of friends sitting on sofa watching sports on TV and celebrating.
Energy Shares

$10,000 invested in Woodside shares at the beginning of 2026 is already worth a whopping….

Investors which hold shares in the oil and gas giant would be jumping for joy right now.

Read more »

Excited couple celebrating success while looking at smartphone.
Energy Shares

Why is everyone buying Deep Yellow shares today?

Find out what brokers expect from the uranium miner's shares next.

Read more »

An oil worker in front of a pumpjack using a tablet.
Energy Shares

Oil is surging and this ASX fuel stock is one of Monday's winners

Viva shares rise as oil jumps and investors shrug off a write-down.

Read more »

Red buy button on an Apple keyboard with a finger on it.
Broker Notes

3 reasons to buy Origin Energy shares today

A leading analyst expects more outperformance from Origin Energy shares. But why?

Read more »

Image of a fist holding two yellow lightning bolts against a red backdrop.
Energy Shares

How ASX 200 energy stocks like Woodside and Santos are surging in Monday's sinking market

Investors are piling into ASX energy stocks like Santos, Woodside, and Beach Energy today. But why?

Read more »

Man in red jumper holds hand out in a vulcan salute.
Energy Shares

Why this ASX stock is slipping today even as it lands a German project win

A Lionheart milestone helps Vulcan shares outperform a weaker market backdrop...

Read more »