UPDATE: Karoon Gas Cancels Brazil IPO, Shares Plunge

Karoon Gas Australia Ltd. (KAR.AU) has blamed unfavorable market conditions for pulling the plug on a US$621 million-US$773 million float of South American assets, indicating corporate activity in Brazil's emerging oil and gas sector could be cooling after a string of successful deals.

The disappointing news sent Karoon shares down as much as 10% Friday before recovering to be down 2.4% by 0020 GMT, continuing the rollercoaster ride for investors after an Australian drilling campaign last year with ConocoPhillips (COP) turned up mixed results.

Melbourne-based Karoon's attempt to list undeveloped prospects in Brazil and Peru followed the recent staggering US$70 billion share sale by state-run energy company Petroleo Brasileiro (PBR), or Petrobras. The Brazilian unit of Spain's Repsol YPF (REP) recently sold a 40% stake in its Brazilian assets to China's Sinopec for US$7.1 billion and several smaller companies such as HRT Participacoes em Petroleo SA have also launched floats.

Karoon shares had already fallen about 27% in the month leading up to Friday as investors took profits on confirmation it was launching the Brazilian intial public offering. Pressure on the shares intensified when Karoon missed a Nov.10 final pricing target and shares in other Brazilian energy companies started performing poorly.

"Recent capital raising by Brazilian oil and gas companies have not performed to market expectations causing some hesitation by investors," Karoon said in a statement.

"Karoon will now consider waiting for conditions to improve before reassessing the best value creation opportunities," it said.

As late as Thursday, Chief Executive Bob Hosking was telling Karoon shareholders at its annual general meeting that completion of the IPO will allow it to concentrate existing cash resources on the second phase of its Australian drilling campaign with ConocoPhillips.

Merrill Lynch analyst James Bullen said this week that a failed IPO could significantly tarnish the credibility of Karoon's management and drive its shares down to around A$7.00. At 0020 GMT, they were down 2.4% at A$7.71.

Karoon intended to retain ownership of 68.1% of the prospects in Brazil and Peru, giving them an implied value of US$1.95 billion-US$2.42 billion.

Brazil attracted global interest in 2007, when gigantic oil fields were discovered off its coast. Pressure on other energy shares partly prompted by more European debt fears, however, would have made it difficult for Karoon executives to sell their proposal on recent roadshows in the U.S., Asia and Europe.

Karoon Petroleo & Gas S.A shares were due to debut on the Brazilian exchange on Nov. 24., with float proceeds earmarked for the development pf seven existing prospects in Brazil and five in Peru.

"While the cancellation may disappoint the market and lead to short-term share price weakness, Karoon management has done the right thing by shareholders by refusing to sell the Brazilian asset at below fair market value." E.L. & C Baillieu Director and Head of Research Ivor Ries said.

Karoon Gas is "well-funded" following recent equity capital issues that raised A$260 million," Ries said. "The company is capable of meeting all of its exploration commitments over the next 12-18 months with room to spare."

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com

(Tom Murphy and Rogerio Jelmayer in Sao Paulo contributed to this report)

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