STX has failed to flow gas from its South Erregulla-3 (SE-3)...

STX has failed to flow gas from its South Erregulla-3 (SE-3) well in WA’s Perth Basin (Figures 1 & 2). The possible gas water contact (GWC) encountered suggests the depth extent of the field has been reached, meaning further upside volumes are limited and incremental phased developments are at risk. Based on the peer average EV/2P multiple, we estimate the existing SE 2C Resource would be worth up to A$0.14/sh if fully converted to 2P Reserve, but that now looks unlikely. SE-2 (to be tested in 5 days’ time) is up-dip of SE-3 and therefore unlikely to be impeded by water. Nevertheless, based on the preliminary data to date (porosity 11%, net pay 16m), we see downside risk to SE-2 flow performance relative to Perth Basin historical averages (Figure 3). Maintain Hold, PT revised to A$0.31/sh (prev. A$0.42/sh) on lower assumed field volumes at South Erregulla.South Erregulla; SE-3 fails to flow.SE-3 failed to flow with a possible GWC encountered.GWC suggests that the depth extent of the field has been reached and upside potential is limited.SE-1 (tested successfully) and SE-2 (testing next week) are up-dip of SE-3.We therefore see only minimal growth in 2P Reserves (128 PJ) from 2C Resource (271 PJ), which was the aim of the SE-2/3 campaign.A 50-100% Resource to Reserve conversion rate would have implied A$203m to A$406m (A$0.07-0.14/sh) of value creation, based on the domestic gas peer average 2P multiple (Figure 4).STX trades at a 40% premium to the average peer 2P multiple of A$1.73/GJ, but we expect STX to convert further 2C to 2P over time.FYI
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