All quiet on the western front at the moment. I sense quite a few holders in STX are expecting the classic share price uplift as we move closer to upcoming drilling campaign. STX has been trading in a 19c - 22c range for a while now.
The STX market cap is hovering around $350m.
I'm not surprised that STX appears to be trading, at least for now, well under what would pass as fair value. In some respects it's actually trading reasonably well in the face of substantial headwinds for the oil and gas sector. It only took a couple of minutes research to unearth some headlines from recent weeks:
'Chevron's NW shelf exit a sign of the times' 'Woodside to take $6.3b hit on lower oil and gas prices' 'Gas fights for its post-Covid-19 future' 'Fossil fuels stocks under-performed for a decade' 'BP faces $25 billion write-off as clean energy shift accelerates'
As I read somewhere the other day the industry is facing a tsunami of challenges. Stranded assets, stranded strategies, funds exiting fossil fuel investments, climate change, Covid-19. Maybe SN should change the company name to Strike-Afterpay and we can turn headwinds into tailwinds.
When you are investing in a story where the macro picture is not favourable you need everything to go right for the investment to go well. While Covid has been for some personally and for many professionally a huge challenge. Woodside's delay of Scarborough and Browse has been a massive win for STX. There is likely to be at least an 18 month window, pre any FID on say Scarborough, for STX to point to the appraisal/production potential across its Greater Erregulla permits. Likely activities to include:
- WE 3/4/5 appraisal wells - SE exploration well (likely 2022/possibly 2021) - Trieste seismic analysis - Minjiny seismic - Waylering/Ocean Hill and other Southern Basin progress - Zemira seismic (BPT/Mitsui) adjacent to Strike's 100% northern PB permits
The cumulative effect of the above should be sufficient for STX to build a multi-Tcf preliminary profile of the Company's full Perth Basin opportunity. Just in time before the NWS JV sorts itself out and Woodside considers whether to push the button on $15b - $20b expenditures on offshore fields. But time is everything and it's absolutely critical that STX goes full tilt at moving as fast as possible. This really is the one-off market window where it must happen. If STX can point to the potential for a large low-cost resource in this 'opportunity window' then the Greater Erregulla resource will be factor in the domestic/export market dynamics and the huge decisions coming in 2022/2023 that will shape and determine the big winners and losers this decade in WA gas supply.
That is why I'm surprised that STX didn't have another crack at WGO. I'm sure I'm not the only one who finds that WGO is increasingly becoming a barnacle to rapid progress. If the posts from our WGO friends are any guide its always about going slower, taking longer, this problem, that issue. IMO STX holders know this drivel is sourced to the motivations of the two primary WGO holders shareholders trying to hang onto the coat-tails of WE while minimising their own dilution in a non-operated JV position. The last vestiges of Basin relevance.
If you want to make serious money as a STX/WGO shareholder, IMO speed is of the essence together with a whole of Basin approach. The obvious example of BPT/Mitsui is a compelling analogy. They are not constraining their activities to simply the area around Waitsia (analogous to having a 100% focus on EP469). Rather they are simultaneously progressing:
- Waitsia appraisal/production - Beharra Kingia appraisal - Analogue Kingia plays - Trieste analysis -> exploration well planning - Zemira seismic
This is happening across all their permits L1/L2/L11/L22/EP320 - it's a whole of Basin approach and it works because the JV is 50/50 across all permits. Perfect alignment. Moreover, both parties bring a lot to the JV, be that technical, operational, financial and market access.
It's quite possible that STX have simply moved on. Noting the 'opportunity window' above time is the risk for STX in dealing with a sub-optimal partner (the only one of their 8 Perth Basin permits they are not 100% equity). But WGO, particularly the ordinary shareholders, have way more to lose because of the misalignment across the northern Basin permits. It's a time bomb that could go off at any moment. It's the Voldermort time bomb, the area directly south of EP469, that WGO doesn't want to name, even though it's a material part of the market cap differential between both companies. The South Erregulla internal reflectivity and stratigraphic imaging in Strike's recent quarterly was the latest clue that STX increasingly expect South Erregulla to become the epicentre of Greater Erregulla activity. The playbook from here is obvious. Post WE5, seismic /exploration/appraisal activity moves to Strike's 100% owned permits and the resultant drilling feeds into upgraded processing capacity built by the third party. 100% STX equity gas. Boom!!!
That's why I'm bemused with the posters on WGO that bang on about 4-5 baggers and takeovers for sure from the upcoming WE appraisal program. Takeovers from who??? Most oil and gas companies - majors or mid-caps - are currently on their knees. Balance sheets are stretched. IMO there is simply no way they are going to throw any money at a non-operated portion of a single permit, when the operator could at any time pursue adjacent targets - same Basin - where they (STX) have 100% of the equity (read ALL the upside). WGO could end up with a limited production profile, with the rest of their implied resource stranded, possibly for years, as its simply at the back of the northern Perth Basin production queue. That's the risk of misalignment. You never get anywhere near full value if you aren't calling the shots.
And to the comparitive value arguments that WGO should be valued the same as STX you have to admire the persistence and mental gymnastics of some WGO holders but IMO it will never happen for the massive misalignment risk above (a time bomb that is one South Erregulla seismic analysis/exploration drill confirmation ASX announcement away) and for the multitude of reasons noted by many STX posters and also referred to in an earlier post:
What I see from WGO is hope. Hope is not a strategy. Hope coupled with ego - in this extremely challenging industry/market environment - is potentially value destroying.
Btw I don't mean to be down on any WGO holder. I sincerely hope all STX/WGO holders make a lot of money. But speed and alignment are fundamental to that. And to WGO holders, any STX announcement not related to EP469 is a discomforting reminder that STX, which occupies a powerful Basin position, will play out this position to its own advantage and for its own shareholders.
We really are in interesting times. Because of the potential scale of the Greater Erregulla opportunity and the potential to be a very low cost supplier, Strike remains a tantalising investment that could truly become a massive story. But there are so many macro challengers that restrict oneself to keep the lid on any rampant optimism. Until South Erregulla comes home 'then put the glasses down'.
As we move into the second half of 2020, looking forward to progressive news flow from both the Company's northern and southern Perth Basin activities. A great time to have diversification across multiple permits and plays in the Basin and most importantly, to be operator and in complete control of our destiny.
As always, GLTA!!
Cheers
Adaltiora
[Tui - 'Altiora Peto' must be the same as 'Adaltiora' - towards higher things!!]
STX Price at posting:
19.5¢ Sentiment: Buy Disclosure: Held
(20min delay)