Strike Energy Limited (STX)Update: Strike Energy: Sensible Takeover of Talon Energy To Consolidate Perth Basin PositionRecommendation: Hold Change: No ChangeOur AUD 0.45 fair value estimate for Strike Energy stands. The small ASX-listed hydrocarbon explorer has agreed to acquire 45% Walyering gas field joint venture partner Talon Energy via scheme of arrangement. The all-scrip deal will see Talon shareholders receive 0.4828 new Strike shares for each Talon share held. Talon will also look to demerge its Mongolian asset to the benefit of its existing shareholders, though the scheme with Strike is not conditional upon it. We see no impediment to the deal going ahead, with Talon directors unanimously endorsing the scheme. The scheme meeting is expected to be held in early December 2023, with implementation by end-December.We think the deal makes sense, simplifying ownership and facilitating possibility for an increased pace of Perth Basin gas asset development. And the magnitude is not such that Strike risks much???Talon shareholders will own approximately 11% of the enlarged Strike upon implementation. Strike says the acquisition will be earnings and cash flow accretive for it, and corporate and operational synergies can be expected. Our 2024 EBITDA forecast improves to AUD 32 million from AUD 24 million.The combined entity will have 1,022 petajoules of proven and probable reserves and 2C contingent resources, only a marginal increase on Strike???s current 980 petajoule stand-alone reserve and resource position. But Talon has additional unrisked prospective resource positions and attractive Perth Basin exploration acreage that appeals.Strike shares have pulled back 24% from June 2023 highs near AUD 0.50, and at around AUD 0.38 are undervalued. Our fair value equates to a fiscal 2027 EV/EBITDA exit multiple of 6.5 and a P/E of 16.8. We assume EBITDA growth to AUD 300 million by fiscal 2027 at a midcycle EBITDA margin of 67%. Strike is the largest holder of gas resources in the Perth basin and in addition to anticipated strong cash flows, potential for resource expansion is a key attraction.
TPD Price at posting:
19.0¢ Sentiment: Hold Disclosure: Held
