Strike's Perth Basin vision is likely to become a reality in the next 12 months.
The transformative UIL acquisition together with acquiring 50% interest in and operatorship of EP469 back in 2018 appeared to come out of left field.
Looking forward, Strike is building significant momentum in the Greater Erregulla play, with appraisal focus in WE and exploration focus on SE. In addition, anticipation is building around the potential in the southern Basin permits. Strike's runway of opportunities across the Basin are very material.
It's reasonable to draw a parallel with Strike's progress in the Perth Basin with the early days of Fortescue. With large incumbents, BHP and RIO, did anyone really give Twiggy a chance of making a success of Fortescue.
Yesterday's Western Australian Government announcement is testament to how the Company has been completely transformed in the last three years. In a relatively short time the Company has strengthened its technical, operational and commercial capability. It's hard not to join the dots between the strength of Strike's Board with yesterday's announcement. It cannot be overstated how important it will be, in building a hugely successful and valuable Company, to have a quality Board that Government Agencies will want to deal with and institutional investors and other funding parties will get behind.
Post the successful Kingia discovery, the market seemed to go bearish on whether this resource discovery could find a path to market. These fears appear to have subsided, particularly with recent market events and STX-ASX announcements. The expected low cost of gas supply is a game changer for STX.
Strike's northern Perth Basin (PB) focus has definitely shifted to the much larger Greater Erregulla story. In betting it's always smart to follow the money. In the PB it's instructive to follow the 3D seismic. The seismic focus is on three areas:
Trieste (BPT/Mitsui) - STX has copy of recently completed 3D seismic survey data
Zemira (BPT/Mitsui)
Minjiny (STX 100%)
Minjiny covers Strike's huge acreage in EPA82/EPA98. The Trieste and Zemira seismic adjoins Strike's proposed Minjiny survey on the western border. IMO Strike, with its fortuitously located and extensive acreage, is ideally positioned to become the leading player in the Basin.
To have operatorship in all 8 licence/permit areas in the PB is unprecedented. Furthermore, to have 100% ownership in 7 of these areas is very exciting for the shareholder base. If through future exploration and appraisal, Strike is able to point towards a Basin resource opportunity approaching 5 Tcf (which would represent a massive Tier One low cost onshore resource) then there is every likelihood that Strike could become the Fortescue of gas.
There has been quite a bit of noise, particularly on the WGO forum, about a possible STX/WGO merger. The obvious rationale for this was noted by Strike in their 23 March ASX announcement. I wonder whether the merger ship has already sailed. They are two totally different companies, one building towards a huge Basin wide energy story, the other confined to non-operator status in one permit. Strike's original proposal to acquire the 50% non-operated share of EP469 included consideration of 850m STX shares. Noting the additional WGO shares issued, per this week's dilutive CR, an equivalent all-scrip consideration proposal today would be around 1:1 ratio.
IMO the WGO shareholder base appears to have three primary constituents:
- two large owners with ~34%
- a very vocal group owning probably <1%
- the quiet majority with say 65% (it's this group which will determine the ultimate ownership of WGO)
As to comparative value it has been somewhat of a punish reading endless posts from a small band of posters as to why WGO should have the same market capitalisation as STX. These theoretical arguments, for some, are centered on a trading strategy trying to exploit some short-term comparative arbitrage assuming the real worth of both companies should be considered only on their interests in EP469.
It may be hard for a few of these prolific posters to acknowledge but these arguments are both facile and futile (the market cap differential has been in place for months and only growing in favour of STX) and they are explicitly erroneous because they significantly underestimate two things:
(i) Underestimating the WGO 'structural' discount
IMO the market has and will always discount WGO due to its non-operated position in EP469, no other meaningful prospects in the PB (read limited Basin runway), ongoing funding concerns (unknown dilution still ahead with WGO still needing to raise tens of millions to first gas), gas processing ambiguity, Board depth/management capability, lack of scale, perceptions they are looking to exit (rather than grow) and finally no value catalysts outside of progress in EP469.
(ii) Underestimating the optionality and upside in Strike's Perth Basin licences/permits
Strike has a massive acreage in the Perth Basin, with nearly all of it owned 100%. In the next 6-9 months the focus of activity will be centered on EP469. However, I expect that from early 2021 there will be a considerable shift in exploration emphasis to Strike's 100% owned acreage in the northern and southern PB. It may be an uncomfortable truth for the 'vocal' WGO holders in trying to compare themselves to STX, however, the really large value long term accretion that Strike is targeting across the Basin is in these areas. Strike views the Basin opportunity as a play right across this acreage, not 10% of it. The UIL acquisition was the cornerstone of this strategy. What may seem like a modest market cap ratio between the two companies of 2.5:1 today, IMO, will progressively expand out to 6-8:1 over the next 2-3 years. And as to the 2.5:1 today, if the value discussion was truly confined to EP469 then what does this really say about how the market rates WGO management!?
There are some other anomalies at play also worth noting.
The weird irony is that every $1 that WGO invests into EP469 activities increases the option value for STX in their fully owned northern PB acreage. A successful EP469 appraisal program - WE3/4/5 - will not only provide an enormous data set for Strike to use in say EPA 82/98/99 but it will enormously increase the market confidence in Strike's 100% northern PB play. So the recent WGO $15m capital raise is a free gift for STX way above and beyond the JV cash calls into the EP469 activities. This will apply to every single future $ that is spent in EP469. It's a classic leverage play.
What is further ironic is that it's quite possible that for example, Strike's first exploration well in the South Erregulla target (EPA82) could be closer to WE2 than WE3 will be. These ironies are certainly not lost on STX shareholders.
As to the two large WGO shareholders, it seems apparent that there is growing misalignment between their motivations and the interests of the 65% majority. The story has been regaled many times. Strike's technical interpretation of the Basin 3D seismic supported their bold acquisition of UIL and into EP469 and the subsequent drilling of WE2 which has provided, amongst other things, a huge wealth shot-in-the-arm for these two holders (and good luck to them). They could, surely would have been stoked with this life changing outcome yet somehow the weird illogical machinations of human behaviour has resulted in increasing reverberations around JV difficulties, illusory legacy lost and relevance deprivation. Go figure!! If this persists the real losers will be the other 65% who surely care way more for value being created rather than the preservation of management egos.
So we'll see if any further corporate activity arises which could give these other shareholders a way out. Maybe it will, maybe it won't. But as an STX shareholder I'd actually prefer that zero-premium was paid. It it was a cash acquisition, sure I'd understand if some premium was applied. But in a merger, where the future benefits accrue to both shareholder groups under the combined entity, there is little justification for a premium. In the event a new proposal emerges, it's the 'quiet' WGO shareholders who will decide. The choice is simple. If you think under Strike's management a combined entity's share price will go higher than staying with WGO, you'd accept. If not, you decline.
In the meantime I expect STX shareholders can look forward to increasing announcements regarding the Company's plans and activities across both the northern and southern Basin. I'm increasingly excited with the Waylering prospect in the southern PB (last ASX announcement 17 February) and of course all the seismic planned on and adjacent to Strike's 100% acreage.
In the short-term we could be an outside chance of joining the ASX300. That would be a truly outstanding milestone on what is becoming a really positive and fun journey as a shareholder. A rare thing in uncertain times.
As always GLTA!!
Cheers
Adaltiora
Expand
(20min delay)