Emerging Permian Gas Fairway toEnable Major New Downstream...

Emerging Permian Gas Fairway toEnable Major New Downstream Development

Key Points

• STX has announced award of a long term lease over a 60acre site servicing the Geraldton Port that would support the development of a 1.4mtpa urea production facility;
• The Company has completed technical design work and engaged the State Government and major third party (industry and technical) over the past 12mnths to scope a facility that would consume up to c620 PJ of raw gas over 20yrs from the Perth Basin;
• STX intends to engage with an industry partner (post a tender process) in the Jun Q to form a JV whereby STX will receive a c30% carried (for the US$1.8Bn of capex through to first production) interest in exchange for dedicated supply of raw gas from its Perth Basin interests;
• Competitively priced raw gas is critical input into urea manufacturing as it forms around 70% of the total production cost;
• We would view that STX is well placed to deliver raw gas towards the lower end of the $3.20-$5.00/GJ price range we determine to reflect the urea market (as the basis for our long term $4.50/GJ av price received applies in deriving our 44cps unrisked valuation):

• As a consequence, the proposed development will be highly price competitive and should therefore attract strong industry interest in the tender process;
• In essence, the strategy is designed to result in STXs 30% share of urea profits realising a “net back” gas price well in excess of the $4.50/GJ blended average we assume;

• The c. 620PJ of raw gas is greater than STXs current 50% share of its est. 2C Resource of 1.2Tcf and well in excess of the volume of gas required to underpin Stage 2 development of West Erregulla;
• This says to us that the Company is clearly confident that its 100% owned interests beyond the West Erregulla permit hold significant resource potential;

• At the very least the release of last week suggests material volume upside potential in the northern extension to West Erregulla (at the WE3 location) on account of formation pressures observed supporting a materially larger (than first predicted) gas column;

• It also suggests that South Erregulla (STX 100% - 1.6Tcf predrill est) been derisked by this result thereby warranting drilling later this CY;