Our current highest conviction oil & gas pick is the Perth Basin pure-play STX due to: - Record high WA domestic gas pricing
- All-time high WA maximum spot gas pricing last month at $11.59/GJ following a decade of under-investment in exploration and new gas developments causing a current tightly balanced market with a forecast significant future supply gap (>200TJ/d post-2030, over 16% of demand, Source: AEMO).
- Gas extremely important for WA's firming capacity of renewables for electricity generation (gas avg. ~40-45% of WA's power, some days 75%+, Source: AEMO).
- Maiden producing asset now bringing in important cash flows
- Walyering is an impressive, simple and low-Opex asset providing strong margins (we model $0.70/GJ at 25TJ/d). Ramp-up has been rapid over the past month with production steady at the contracted gas rate of 20TJ/d.
- Potential to ramp-up to the plant's nameplate capacity of 33TJ/d over the current quarter, providing potential spot-market exposure (and associated higher pricing).
- Material organic and inorganic growth, funded with ~$175m cash & undrawn debt
- STX is targeting to acquire TPD through a Scheme of Implementation that aims to consolidate 100% of the Walyering cash flows (~$60-80m gross FCF p.a., at 25-33TJ/d) and increase the Perth Basin exploration footprint (L7/EP437 and Condor).
- Continue on its Gas Acceleration Strategy of up to 3 other sources of gas production by end-2025. We model production of up to ~52PJ p.a. and FCF of up to ~$264 million p.a. at full run-rate (assuming successful TPD acquisition).
- Recently de-risked asset base
- Following successful appraisal at 100%-owned South Erregulla and likely ~178PJ resource to reserve conversion, we foresee STX achieving a predominantly reserves-weighted portfolio when reserves are independently certified, target Dec'23 (549 PJe 2P Reserves and 432 PJe 2C Contingent Resources - 981PJe total).
- M&A look-through value significantly higher than current share price
- 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 that metric, Strike's gas portfolio is valued at ~$2 billion, equal to ~$0.80/sh.
Action We have a Buy recommendation and Price Target based on a risked Sum-of-Parts Valuation of $0.62/sh, materially higher than the current share price ($0.40/sh). Upcoming Short-Term Catalysts - SE-3 appraisal results (late-Nov/early-Dec), Reserves Certification (target Dec)
- EP469 (West Erregulla permit) exploration drilling (1HCY2024)
- Implementation of Scheme with Talon Energy (target Dec)
- Potential bids for STX, may be prior to explo drilling in 1HCY24, post-2HCY23 activities
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