Karoon Energy : 2021 Annual General Meeting Address and Presentation

For personal use only

26 November 2021

Company Announcements Office

ASX Limited

Dear Sir / Madam

Karoon Energy Ltd

2021 Annual General Meeting - Address by Chairman and Presentation

In accordance with ASX Listing Rule 3.13.3, enclosed are the Chairman's address and a presentation to be delivered at Karoon Energy Ltd's 2021 annual general meeting.

This announcement was authorised by the board of Karoon Energy Ltd.

Yours faithfully

Nick Kennedy

Company Secretary

For personal use only

ASX RELEASE

Issued 26 November 2021

Chairman's address

Good morning ladies and gentlemen.

The 2021 financial year (FY21) was one of the most significant in Karoon's 17-year history.

With the global Covid pandemic in full flight, the Company renegotiated and completed the acquisition of the Baúna oil field in Brazil, thereby entering a new era as an operator of material oil production.

Since the acquisition, the macro-oil environment has been very supportive for Karoon's business. The oil price increased from approximately US$45/bbl at the beginning of FY21 to more than US$80/bbl today, reflecting a recovery in oil demand as the global impacts of COVID- 19 eased, combined with supply constraints implemented by OPEC+. This has had a positive impact on cash flows generated from Karoon's operations, leading to a material strengthening in our financial position over the year.

The company's FY21 financial results were significantly complicated by foreign exchange losses, transaction costs and accounting standards associated with the acquisition of Baúna. Statutory Profit was US$4.4 million and Underlying Profit was US$33.4 million. From the Board's perspective, the key takeaways from FY21 are that as at year-end Karoon had US$133.2 million in cash with no debt, approximately 13,300 bopd of high margin profitable production, and sanctioned projects targeting an increase to 30,000 bopd early in CY2023. Our CEO, Julian Fowles, will expand upon the financial results during his presentation.

Evolution and delivery of strategy

At last year's AGM, the board outlined three strategic imperatives in its quest to build a global exploration and production company:

1. Firstly, in the near term, to complete the acquisition of the high-quality Baúna production asset and doubling the field's production to 30,000 bopd through a well intervention campaign and the development of the nearby Patola oil field.

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During FY21 the Baúna transaction was completed and the board sanctioned investments in both of the associated organic-field projects. These projects remain on track to commence production in mid-2022 and early-2023 respectively;

1. Secondly, in the medium term, to advance growth opportunities. In the first instance the Neon/Goiá project, but also to pursue further production acquisitions and appraisal opportunities.
   During FY21 progress was made on maturing and optimising the potential development of the Neon/Goiá project. This work is expected to be completed towards the end of calendar 2021, which will lead to a decision in early 2022 on whether to drill a Neon control well using the Maersk Developer rig. Evaluation of other production acquisition opportunities were also conducted during FY21 based on our strict technical and financial criteria; and
2. Thirdly, in the long term, the need to expand into energy markets beyond traditional oil and gas. Work on this final imperative is continuing to evolve in line with the first world's rapidly changing societal desire for a carbon-constrained future.

With the rapidly changing external environment, and a new CEO in the chair, the company initiated a refresh of its strategy during FY21, the results of which were recently released to the market. Julian will expand upon this in his presentation, but at a high level, our goal is to create a sustainable oil business, anchored by our Brazilian producing asset and the associated organic-field projects under development. We want to be a business which is well positioned for the challenges and opportunities of the energy transition, and a business which delivers strong long-term returns for our shareholders.

From the board's perspective, there are three overarching strategic imperatives we will now focus upon under the refreshed strategy:

1. Firstly, the safe & reliable production from the Baúna field and the seamless delivery of the Baúna intervention campaign & the Patola oil field development project;
2. Secondly, to move rapidly to "future proof" the company by ensuring we have a high quality sustainability program in place, not just for our current projects, but to align our growth aspirations with societal expectations of a low carbon future; and
3. Thirdly, to introduce another value accretive production asset over the near to medium term, to diversify our asset base as a risk mitigant, whilst also making the company a more attractive investment proposition to a deeper investor base.

In a broader context, while the board is focussed on the delivery of these strategic imperatives, we will also ensure that disciplined capital deployment, and risk management, are at the forefront of the company's actions.

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Building the team and processes to deliver the strategy

Making the transition from an exploration to an operating production company is a major transformational step for any organisation.

During FY21, several changes were made to Karoon's Board, management and corporate structures, to ensure we have the appropriate future skills and capabilities, corporate and operational governance processes, and the necessary accountabilities, to successfully make this transition and deliver on our strategy.

• In October 2020, Mr Peter Botten AC joined the board as an independent non-executive director.
• After an extensive international search process, Dr Julian Fowles was appointed as CEO and Managing Director in November 2020.
• In early 2021, the Company was restructured to help clarify reporting lines and accountabilities, leading to improved governance processes and faster decision making, which is essential for Karoon as a production operator.
• Mr Ray Church joined as Executive Vice President and Chief Financial Officer of Karoon Energy Limited in September 2021.
• At about the same time, Mr Antonio Guimarães joined as an Executive Vice President of Karoon Energy and President of Karoon's Brazilian operating subsidiary.
• Over the year, the Company also ramped up materially its operating capabilities in Brazil, and now has in place a team of highly experienced technical, operational and commercial professionals located in Rio de Janeiro and at our operational shore base in Itajaí.

These were major changes for any organisation, and the board acknowledges the great contributions made by retiring directors and managers who guided Karoon to where it is today.

Capital management

Capital management has also been a strong focus of the board in FY21.

With this in mind, and in light of the challenging oil market in early FY21, Karoon successfully renegotiated with Petrobras the acquisition terms for the Baúna asset. The parties changed the structure of the transaction from an upfront payment of US$665 million to a firm consideration of US$380 million plus a tiered, contingent consideration of up to US$285 million (plus interest), dependent on future oil prices.

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The reduction in the upfront payment, combined with strong cash flows from operations since completion of the purchase, has left the Company in a strong financial position, with cash of US$175 million and no debt as at the end of September 2021.

Our capital commitments for the Baúna intervention program and Patola development will be funded by a combination of cash flows from operations, our existing cash, and a new US$160 million reserve- based, non-recourse, syndicated debt facility. The facility, with a high-quality international syndicate comprising Deutsche Bank, ING, Macquarie and Shell, represents the first time Karoon has accessed debt markets, and provides a cost competitive source of finance.

As part of the terms of the loan, Karoon has implemented a hedging program covering approximately 30% or less of its 2P production over the first 22 months of the loan life. This capital management program will protect operating cash flows against the risk of lower oil prices on the hedged barrels, while retaining material upside price exposure.

Going forward, Karoon's priorities for capital allocation will continue to be:

• Firstly, to ensure safe and reliable production from Baúna;
• Secondly, to build and maintain a strong and flexible balance sheet, including meeting debt repayments and satisfying debt covenants;
• Thirdly, to continue to invest in our already-sanctioned, high value organic growth projects (ie the Baúna intervention campaign and the Patola field development); and
• Thereafter future growth opportunities and/or dividends or capital returns to shareholders. Future growth opportunities, either organic or inorganic, will be subject to strict economic assessment and financial discipline and will compete against the value of returns to shareholders.

While oil prices are currently very buoyant, the challenging conditions experienced in early 2020 emphasise the need for our current, and future projects to be resilient to price volatility.

Remuneration

Turning now to remuneration. During FY21 Karoon continued to maintain conservative remuneration settings. In this regard, it is noted that:

• Board and senior executive base salaries remained substantially unchanged from FY20;
• For the first third of FY21, the Board and key management personnel in Australia took a 20% reduction in fees and salaries to help preserve capital given the serious COVID-19 uncertainties;

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