Event STX has announced 16m net pay at the South Erregulla-2 appraisal well, better than the 14m net pay at the South Erregulla-1 discovery well and the 6m of net pay encountered by Beach Energy (ASX.BPT) in the Trigg NW-1 well drilled recently directly to the south of the South Erregulla permit boundary. Additionally, Walyering is now producing gas with the Tuesday rate at 21TJ/d, after only a week of being online, on the ramp up towards nameplate capacity of 33TJ/d (note we model average rates of 25TJ/d, allowing for a potential future upwards re-valuation). Impact This appraisal drilling result should see the full 178 PJ of 2C Contingent Resource in the primary Kingia reservoir converted to 2P Reserves, de-risking the field and development. The conversion of Contingent Resources to Reserves at South Erregulla is important because it looks to convert STX's net gas portfolio (not including combined pro-forma TPD gas) to Reserves-weighted from predominantly Contingent Resource-weighted; - Previous - 371 PJe 2P Reserves and 610 PJe 2C Contingent Resources (981PJe total), to
- Conversion - 549 PJe 2P Reserves and 432 PJe 2C Contingent Resources (981PJe total).
In terms of valuation, STX's JV partner in West Erregulla (Warrego Energy) was acquired earlier this year by Hancock for ~$440 million (~$2/GJ) for a Reserves-weighted gas portfolio in the Perth Basin (net 211 PJ 2P Reserves, 15 PJ 2C Contingent Resources). At the Hancock/Warrego transaction metric of ~$2/GJ, Strike's gas portfolio is valued at $1.96 billion, equal to ~$0.80/sh, greater than the company's current share price. Action We maintain our Buy recommendation and increase our Price Target to $0.62/sh, based on decreased risking of our South Erregulla field development given the successful appraisal drilling results and therefore de-risking of the gas resource size. We believe that the stock has the opportunity to re-rate from the current share price towards our Price Target ($0.62/sh) on the back of two successful material catalysts with successful appraisal drilling at South Erregulla and gas production at Walyering. We would also not rule out potential incoming bids for STX given the recent significant de-risking of the company, the macro backdrop of continued record high WA domestic spot gas prices, the position as the largest independently certified gas resource holder in the Perth Basin, and the fact that STX looks to be the only new supply of material uncontracted gas to the WA market (up to 4 sources of gas production by the end 2024). Catalysts - South Erregulla-3 appraisal well results (approx. mid-late November)
- Independent certification of South Erregulla Reserves - target December
- EP469 (West Erregulla permit) exploration drilling (1HCY2024)
- Implementation of Scheme with Talon Energy (ASX.TPD)
- Potential bid(s) for STX, may be prior to exploration drilling in 1HCY24
| 
(20min delay)