Time seems to have moved slowly for STX since the SE1 Wagina and Kingia discoveries. In some respects, it's unfortunate that the momentum from these discoveries has not (yet) translated into strong share price action. However, it's totally understandable that many in the market need to see Walyering and SE1 flow tests for the true validation of these discoveries. The reality is that the key price catalysts are ahead, rather than behind.
I see the flat lining of the SP in the low 30's over the last month as a positive in establishing a value floor, in the absence of material follow-on announcements. The delays from recent discoveries to upcoming flow tests were not ideal but small beer in the scheme of things. For many it's been an opportunity to get set for the next leg-up in value. When the Walyering flow tests commence, there will be regular updates and news flow as the four wet charged reservoirs are tested followed by a co-mingled test of all horizons. Then the testing moves to the exciting SE1 discovery, with both the Kingia and Wagina zones likely to be tested in May.
W6 is also expected to spud during May.
With such an anticipated period of news flow, IMO it seems highly probable that the 'technical' SP levels are likely to get rolled if/when positive announcements come through. It may well be that this period of trading in the low 30's is the pause before the SP finally moves into the fast lane, a transition that would be very welcomed by STX holders. With the potential for independent assessment of recoverable volumes in both Walyering and SE1 possibly in June, this is a pivotal quarter for near-term value accretion.
It was always going to require a series of follow-on announcements beyond the Walyering/SE discoveries to drive increased value.
The market cap ratio of STX to the EP469 JV partner continues to grow, now approaching four (4) times. It does appear evident that a switch out of this partner into STX is now gaining momentum. The old adage, 'no news flow - no point being here.' The sheer weight of upcoming news flow in STX during Q2 is a well-signalled value lever that smart investors want to be positioned for. Were the STX news flow to be positive during Q2, I would expect this market cap ratio to increase to greater than 6:1 by June 30.
The key calendar 2022 WE activities in EP469 are likely to be the re-test of WE5 and re-entry into WE3. It's unclear to me what value accretion could/will come these activities. I strongly doubt that these activities will increase total resource levels (beyond previous resource announcements) however, the level of reserves within this number should improve. IMO any assumption from the EP469 JV partner that these activities will materially add value to their maligned SP is deeply misguided. They are tapped out with one contract in Phase One and no runway to deliver anything further. They are in a commercial cul-de-sac, created by an accumulation of poor decisions.
With the SE1 discovery soon to be flow tested and assuming positive deliverability is established, then all considerations around Phase Two will move to the 100% owned STX acreage. As numerous others have noted, it's the agency and ability to bring recoverable reserves to market that is the key that unlocks value. STX have the keys to Phase Two. Positive SE1 flow tests + 100% ownership = Phase Two gas supply.
The two activities in the EP469 lease area that are more likely to positively influence value are future 3D seismic and the drilling of WE6 (success here likely to give effect to an increase in absolute resource levels). However, with the glacial pace of WE activities as STX priorities are changing to other more important and valuable areas of delineation and endeavour, it's now expected that these two activities will not occur until later in calendar 2023. The absence of any material news flow for another 18 months will be tough to take for long suffering EP469 JV partner shareholders. I recall one of the water diviners arguing with @rexsh that the JV partner could sole risk in WE. That was all-time too funny. They sole risked the original 3D but couldn't interpret the seismic results. And no-one will easily forget their attempt to sole risk a technical opinion on the GWC. When it came to progressing EPA-0127 they decided to phone a friend and give half way for a pittance. IMO the consensus view is firming that regrettably the JV partner story is a value-trap and, to make money investing in the Perth Basin, investors should look and are looking elsewhere.
In addition to the substantive news flow from the upcoming Walyering and SE1 flow tests there are IMO two potentially momentous events (announcements) that, were they to happen, you would want to be an STX holder because they would immediately point to material future value.
The first of these is Haber offtake. How I think about Haber is what would a future Haber FID mean for the attribution of value to STX. From previous announcements, it appears that STX are targeting a Haber FID in H1 2023 (approx. 12 months +/- a month or two). STX has openly stated an intention to be free carried somewhere between 30%-50% of the project. Assuming, for discussion purposes, a discounted cash flow of $3B was modelled to support FID, then the imputed value of a 'free-carried' STX equity stake would approximate $1B - $1.5B. It's very unlikely that the market would assign no value up to FID and then full value at FID. More reasonably there would be progressive apportionment across say offtake/FEED/Equity/Debt/FID/beyond FID. There are too many variables to get precise here. Nonetheless, Haber offtake, particularly if an announcement of real materiality with a strong offtake party (or parties) IMO would be a hugely accretive event for STX and set in train a series of value milestones leading up to FID.
The second is a possible future announcement around the WA Government Gas Policy Opportunity. By enabling Haber, Strike is in the box seat for exemption to the domgas policy. It's massive optionality for STX. The opportunity noted on Slide 10 of the recent Euroz presentation points to literally off-the-chart netback pricing. Adopting a deeply conservative premium of say $2/GJ could provide a substantial revenue/margin windfall from future export gas sales. In determining a theoretical value for what a favourable decision may mean for STX, it would seem reasonable to adopt a similar export volume that Waitsia has received. My best estimate here is approx. 500PJ. By applying the same export volume and applying a modest $2/GJ premium you get one billion ($1B) in incremental value. It's extraordinary to let the value implications of that sink in. One Government decision could deliver circa 50c value. Project Haber will potentially bring enormous value to the WA economy, so the case for an export licence is compelling.
No Haber, no opportunity for domgas exemption. No SE1 success, no Haber, no domgas exemption
You carry the above logic through and just how important the SE discoveries were/are to Strike become manifestly clear. But there is still the definitive need to confirm well deliverability at SE1 and of course an offtake announcement (which signals that Haber is game-on).
With regards to what else could affect the SP outside of global machinations for a Company pre-revenue there is always the latent concern around increasing activity levels v funding. The upcoming Quarterly will provide more granularity on this. However, I see funding as a lower order shareholding concern now. With the recent discoveries and multiple positive catalysts on the near-term horizon, I see few obstacles to the Company (if required) securing a quick placement and/or additional debt facility. Opportunists hanging around the hoop looking for some negative SP reaction are likely to be disappointed here. And, with Walyering, the prospects of strong cash flows from early 2023 are soon to be confirmed by positive flow tests.
As to any takeover, I have a neutral view here. It's a public Company and the ambitions are well stated and clear. The likes of MIN/WES/WPL would have a watching brief. But these companies are rarely in a hurry and typically remain cautious and let Company's like STX take all the risk and grow to a point of materiality (or not). Then after sometimes years of quiet observation they (may) choose to act decisively. They prefer to pay $2B - $3B for a real story, a sure thing, rather than take a punt and pay $800m for 'a what could be'. Accordingly, I see the potential for serious corporate activity to be greater than 12 months out. Importantly, with so much activity on foot the Board's internal valuation models are likely to have value outcomes significantly higher than the current SP, so there's no way JP and Co are giving this puppy away.
There have been around half a dozen announcements since the 7 March SE Kingia discovery announcement. I'm extremely confident that when we are twenty announcements past this discovery, at some point in this April-June quarter, we'll be making new highs. And if either of those two potentially huge announcements come out, IMO we will most definitely be moving to the fast lane.
Best for the next couple of months, full of material news flow.
Cheers and GLTA
Adaltiora
STX Price at posting:
33.0¢ Sentiment: Buy Disclosure: Held
(20min delay)