Well that was a really detailed and informative announcement. It might have seemed like only ripples on the STX pond of late but clearly there has been some serious paddling under the surface. We are very fortunate to have such a strong and capable technical team committed to the analysis that is fundamental to creating future value. STX are pioneering a massive gas fairway opportunity that is actively evolving on a monthly basis.
IMO this is so much more than simply West Erregulla and the EP469 JV. The latter is just the entree to what could end up as very large Perth Basin (PB) main course. From this update it's now clear that the focus of STX is on the whole fairway. Ambitious -definitely, exciting - absolutely and the rewards could be enormous. It really doesn't matter anymore whether you invested in STX for onshore US (from way back to the Rayburn/Mesquite days) or the Eagleford Shale, the Cooper Basin (Jaws/other) or the Perth Basin. It's the Perth Basin that will ultimately determine how big the return on investment will be. The JV at West Erregulla is a great first step but the EP469 lease boundaries appear to have little relevance to the Greater Erregulla Gas Project opportunity!!
With the EP469 JV, will be interesting to see what WGO does next. Had a much smaller position here but sold it when it became clear the ego's of the Scotsmen were starting to override common sense. I don't like to negatively discuss another poster so I'll use the name 'Tom Riddle' but Tom has been relentlessly posting on both WGO and STX forums that WGO should separate themselves from STX and it was actually WGO that discovered the 1.2Tcf resource. Really?? They found nothing!! What SN/TC and the STX team did was huge for both WGO and STX shareholders. In fact we've all been hit in the A by a rainbow. I recall rexsh and a few others saying it but a merger between WGO and STX would have had obvious benefits to both groups. But from this announcement it looks like that ship has sailed and WGO shareholders will be confined to the boundaries of EP469. Of course not a bad result but any opportunity to participate in the greater fairway looks to be over for WGO shareholders. I would expect that at some point in the next 18 months that the STX:WGO market cap ratio will climb to over 5:1 times from the 2:1 times today. Be interesting to hear from Tom then. Sold my WGO when they announced costs to be dedicated to WA office and staff. What a waste of money. I wouldn't be surprised - with a large upcoming capital raise ahead - they fold and sell out. Actually be a good result for STX if a new partner with deep technical bench depth and solid capital backing join them in EP469.
The potential huge scale of the Greater Erregulla Gas Project together with the real possibility of being the low cost supplier to WA gas market is an amazing combination that the market doesn't appear to have fully grasped yet. Still early days but the ingredients are there, probably need 12-18 months to really demonstrate how good this play could be. So many O&G companies promise so much but they nearly always find ways to destroy SP value. The following may be a surprise to some but indicates that on an approx last 10 year basis companies usually go backwards - on a SP measurement:
Only Beach has moved forward with +30%. I'm certainly not holding STX to go from say 20c to 26c. My sense is this could be one of those very rare opportunities for a huge multi times result. Sure, as TUI has noted, SN is ambitious to create a multi-billion MC company. Yep I'd take $3B - $4B MC but hopefully we can keep share capital under 2 billion shares in getting there. That would be some serious value creation. As an analogy Fortescue (FMG) was around $1.90 eleven years ago (and a lot less 15 years) so it's grown MC by about seven times over the period which is a massive result for shareholders. That's why it's so good Nev Power is on the STX Board - he's a builder and a builder who has a track record of creating massive value from a very concentrated and focused WA business. While iron ore and gas are totally different businesses the value premise is the same:
Lots of product x low cost of supply = high margin + huge value
The critical unknown for STX is 'how much product'??? The clear and intended takeaway from today's announcement is ''we are going to need a bigger boat'' - this could be a lot of product (ie massive gas fairway). For shareholders it's a case of do you want a quick one-off sugar hit and say roll into a 40-50c takeover (no shortage of increasingly interested industry players) or give management enough time to explore/appraise the identified fairway and IMO position the Company for multiples of 40c. That's certainly the view expressed by MIR yesterday and plenty of others and MIR, for example, seems very close to the action. BUT if you want the multiples you'll have to cop the quiet periods like the last few months and literally ignore the usual rampers - up and down - that will drop in and out of this stock. The good news is that if we climb into the ASX300 and also get increased traction with analysts from IB's like Credit Suisse the stock could start getting some serious momentum. The other obvious but similarly positive angle to the story is that it's basically a one resource, connected fairway play so relatively easy to understand. Compare to say beach, Santos and Woodside that are just so complex with many moving parts. We are potentially sitting right smack bang in the middle of a huge onshore gas resource, that doesn't require engineering miracles or billions to extract. Furthermore in a changing world and dynamics of fossil fuels this resource, if/when total fairway potential is defined, can be brought on in $15m - $20m increments not say $20B like Browse. In an uncertain world with risks of stranded assets the PB fairway will only better and better as potential volume and low cost of supply is confirmed. Not sure how any Board could give Browse the tick at $20B upfront and potentially unconvincing economics.
Importantly, while the big value accretion will take time it's likely that more regular updates and PB news flow will come our way in future months. And not just from STX with other operators in the basin updating on their own activities, both drilling and gas marketing. You can see that some of the IB analysts will probably start putting out specific PB updates. Once this happens then we will all be in a very fast moving river, with a growing audience as the PB potentially becomes the highest profile onshore gas basin in WA but Australia. We could end up in the perfect storm - being the most nimble and valuable player located in the best new resource.
Bring it on!!!
GLTA
Adaltiora
STX Price at posting:
18.5¢ Sentiment: Buy Disclosure: Held
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