Karoon Energy (ASX:KAR) Drops to 6x P/E: Time to Buy the Dip?

Karoon Energy trades on 6x earnings as oil sentiment turns sour

Karoon Energy (ASX: KAR) fell alongside the broader ASX energy sector this week as oil prices dropped toward one-month lows. The stock now trades around A$1.64, well below its 12-month high, even as the company keeps generating solid cash flows and buying back its own shares. Adding to the noise, Citigroup exited as a substantial holder on December 11, which raised some eyebrows. But we believe this sell-off is a sector-wide issue, not a Karoon-specific problem, and the current price could be a gift for patient value investors.

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Why Karoon Energy Is Falling, And Why It May Not Matter

The selloff in Karoon shares reflects sector-wide headwinds rather than any company-specific deterioration. Oil prices have been under pressure from concerns about oversupply and soft global demand, particularly from China. When crude prices fall, oil producers typically follow, regardless of their individual fundamentals.

The Citigroup exit is also less concerning than it might appear. According to ASX filings, the reduction in holdings was driven by securities lending agreements, not a bearish investment call. This is a technical adjustment that happens regularly among institutional custodians, and in our view, it says nothing about Karoon’s underlying prospects.

This reflects management’s behaviour. The company has repurchased nearly 4.9 million shares under its on-market buyback program, with the board explicitly stating that Karoon shares are significantly undervalued. When insiders are buying while the market is selling, value investors tend to pay attention.

The Value Case for Karoon Energy at Current Levels

Karoon’s valuation metrics are compelling by almost any measure. The stock trades at a price-to-earnings ratio of approximately 6x, compared to an industry average of around 15x. In other words, the market is pricing Karoon at a steep discount to its peers despite the company generating substantial profits.

The dividend yield sits at roughly 4.5%, providing income while investors wait for the market to recognise the value. Combined with the ongoing buyback, Karoon is returning meaningful capital to shareholders.

Financially, the company is in solid shape. Karoon Energy generated US$434 million in operating cash flow in 2024, with a free cash flow margin of approximately 45%, well above industry norms. Net debt sits at US$237.9 million following the Baúna floating production vessel purchase, but this remains manageable given the strong cash generation. Analysts see upside here. The consensus price target sits at A$2.10, implying roughly 28% upside from current levels.

The Investor’s Takeaway for Karoon Energy

The bull case is straightforward. Karoon is a profitable oil producer trading at a fraction of its peers, generating strong cash flows, paying a solid dividend, and actively buying back shares. For value-oriented investors comfortable with oil price exposure, the current entry point looks attractive.

The risks, however, are real. Karoon’s earnings depend heavily on oil prices, which remain unpredictable. The company also concentrates much of its production at the Baúna field in Brazil, which had a 12-day shutdown for anchor chain repairs in late 2024. Any future maintenance issues could impact near-term results.

For investors with a longer time horizon and tolerance for commodity volatility, Karoon Energy appears to offer genuine value at current levels. At a P/E of 6x, the market seems to be pricing in considerable pessimism, and we believe patient investors could be rewarded if sentiment shifts.