Euroz note 60 c valuation

Strike Energy Limited

PRICE (A$)

-

TARGET (A$)

-

RATING

0.40

0.60

BUY


STX Update; To acquire TPD, Timeline for current drilling

Proactive - Project Update - M&A

Event

STX announced that it has entered into a binding Scheme Implementation Deed with TPD under which Strike will acquire all the issued shares in Talon by way of a Scheme of Arrangement. On implementation (target December 2023), Talon shareholders will receive 0.4828 new STX shares for each TPD share held (implied offer price of $0.212/sh, which was a ~21% premium to the TPD last closing price).

In parallel with the Scheme, Talon will look to demerge its Mongolian asset to the benefit of Talon shareholders to potentially deliver additional value.

Additionally, STX has started drilling at its 100% owned South Erregulla field, with the aim of converting 2C Contingent Resources to 2P Reserves. This week Beach Energy (BPT.asx) announced a successful Trigg NW-1 well result (6m net pay in Kingia reservoir) ~1km south of the South Erregulla permit boundary.

Impact

A merged co with TPD provides:

• ~$75m FCF p.a. from Walyering. Allows 100% of Walyering cashflows to accelerate STX gas developments (South Erregulla targeting first gas 2HCY24)
• >1000 PJ resource position (largest in Perth Basin)
• Increased footprint with 100% ownership over 10 permits with 50% of West Erregulla (clean structure for a potential major acquirer)

We believe this deal, and potential success with South Erregulla drilling, looks to strengthen STX into a future prime takeover target from a major (Hancock, MIN, STO, WDS, current or future consumer) looking to secure not only cost but also security of future gas supply, given current record WA domestic spot gas prices(>$9.50/GJ) and a significant supply gap forecast from 2030.

Hancock successfully acquired Warrego (reserves-weighted gas) for ~$2/GJ, at that metric STX is valued at ~80cps (with appraisal drilling targeting conversion to reserves-weighted position). At ~$10/GJ realised gas pricing, the STX val is ~80cps.

Action

We maintain our Buy recommendation and Price Target of $0.60/sh. We have cut back our Walyering production numbers due to project delays (37.5% uptime reduced from 75%) for this HY, which has not impacted the total sum-of-parts valuation.

Our pro-forma TPD deal look through risked valuation remains at $0.60/sh, providing uplift for consolidated Walyering cashflows and expanded exploration footprint but diluting for extra shares. We do not yet formally carry due to timeline and moving parts.

Short-term Catalysts/Timeline

Appraisal drilling looks to re-rate the STX share price upwards on potential success

• South Erregulla-2 well result (~early Oct)
• South Erregulla-3 drilling (~early Nov with results 30-45 days following)
• Certified 2P Reserves from drilling (~early Dec)

Euroz Hartleys

[email protected]