The Western Erregulla update today highlights the stark difference between STX's Perth Basin activities and other WA players. MinRes Perth basin activities delayed a year, Scarborough maybe 2 years, Browse maybe never. These are material changes to timelines with the resultant future gas market shortages.
Against this backdrop for STX to point to a three well campaign from Q3 likely rolling into Q1 2021 is tremendous news. In addition, there will be substantial seismic shot over remaining areas in EP469. All these activities should provide regular news flow from Q3 this year right through to the middle of next year. A lot for shareholders to look forward to.
It's only natural that both parties in the EP469 JV want to extract maximum value from this aggressive timeline and substantial appraisal program. Howver, as rexsh clearly pointed out earlier today, WGO is at least one funding round behind STX and to use that oft quoted expression, 'it's complicated'.
Each party to the JV will need to come up with ~$40m capex (total $80m) fro the JV to get to West Erregulla Phase 1 First Gas. STX are confident they have means to get there. For WGO this $40m hurdle is clearly a dilemma, for a company with a current market cap around $80m. In effect they have to come up with a plan to secure funds (equity + debt) equivalent to half their market cap, in the current Covid-environment. And this $40m is separate to their ongoing working capital for staff/overheads/etc. It does appear that a number of WGO shareholders aren't aware or are blissfully choosing to ignore this funding problem. No funding, no party!
There is no escaping the reality that a lot of the JV value likely to be created/confirmed in the next twelve months could be diluted away fro WGO shareholders if the company cannot successfully solve this $40m funding solution in a value accretive way. The WGO Board will no doubt be very mindful of this. It would be an act of corporate self-harm if they get this wrong.
As an STX holder I've been somewhat ambivalent as to the merits of a STX/WGO merger, from an STX perspective. This is because of STX's February 17 ASX presentation - a must read for both STX and WGO shareholders. If we indulge ourselves a jump forward in time eighteen months, post the Minjiny 3D seismic across vast areas of EPA82 and EPA98, the potential of the ex-UIL ground (acquired by STX) will become increasingly clear. IMO this ground, in the northern Perth Basin alone, could deliver value to STX shareholders greater than 2 times the full (100%) EP 469 value. It's a massive short to medium-term exploration opportunity and currently STX owns 100%. However, the obvious benefits of one entity owning the entire Greater Erregulla play (including EP469) would be considerable to all shareholders. A low cost, high margin, potential very large multi-Tcf gas play perfectly positioned in the WA gas market for years to come. A genuine Tier One asset. And that's just the northern Perth Basin. None of the above accounts for any value attributable from all of STX's southern Perth Basin assets, like Ocean Hill and Waylering. The latter appears highly prospective.
For any merger considerations the short-term value upside is definitely biased to EP469 activities. However, IMO the significantly larger value upside beyond the middle of next year is the Greater Erregulla story (ex UIL ground) which early indications suggest could be very large. The first identified prospect, South Erregulla, has best estimate prospective of 1.6 Tcf. It's a classic give and take merger scenario for WGO shareholders. Give up some today for a bigger tomorrow.
The difficulty for the WGO Board is obvious. Make poor capital decisions today and the resulting equity dilution or financial pain from non-typical funding solutions is likely to become a permanent anchor/value cap denying existing shareholders the future rewards they are hoping for. Moreover, STX will simply push-on from a non-merger, be happy with 50% of EP469 and still have 100% of ex-UIL ground - both northern and southern Perth Basin.
Whatever WGO may say publicly, if they agreed to a merger all their shareholders will basically be carried into a broader Greater Erregulla play and never again have to worry about duplicate staffing, gas marketing and Board/ASX compliance costs, constant funding/dilution hassles and the madness of competing with STX for same customers (surely value destroying). The two primary WGO shareholders would own ~340 million STX shares combined at the 1.2:1 proposed merger ratio - a comfy lucrative ride down the Greater Erregulla fairway. They could sit back and let the STX Board and management make them a bucket load and cash and say, "look what we created".
Bring on Q3....
Adaltiora
STX Price at posting:
12.5¢ Sentiment: Buy Disclosure: Held
(20min delay)