is stx a buy at 12 cents?

Is STX is a buy at the current price of 12c? I think so.

How did I arrive at this valuation?

Much has been posted in regard to STX’s share price – at one end of the spectrum, holders are angry about the price deterioration while at the other end, people are advising patience. In the ideal world the price should reflect the value of the company. If, as Specking stated on the 15/12/12, technical analysis cannot be applied to small speculative companies, then we should attempt to calculate the fundamental value of the company. Not easy with a spec.

I believe STX is a buy and as a consequence have bought in at the current price. This is my reasoning.

There are 4 drivers influencing the share price: the Cooper, Palta, Permian Basin and Bigham1H.

In July 2012 RBC estimated Strike’s Net Asset Value of its Cooper tenements at 13 cents per share. (http://www.strikeenergy.com.au/images/stories/pdf/20120725_RBC%20Capital%20Markets%20Initiation%20Research%20Report.pdf) While the 13 cent valuation could be challenged, it must be remembered that nothing in the Cooper during that period has changed significantly. Consequently, the current STX share price is justified by its Cooper’s assets.

The current, short term values in the Cooper have not changed significantly in recent months. From my observations only BPT has a rising trend. It is generally accepted that the Cooper will eventually be aggregated, and BPT seems to be the lynch pin – it will either takeover the minors, or it will be taken over by an international.

If BPT wants to be the major player in the Cooper, it has good reasons to run an eye over Strike. First, STX has considerable acreage in the Cooper; second, STX involvement in the Texas shale would give Beach improved access to US shale technology. (I read somewhere that STX had more technology at its disposal at Bigham 1 than was available in the whole of the Cooper); thirdly, Palta 1 would sit comfortably with Beach’s Carnavon, Browse and Bonaparte investments; and fourthly, as STX’s share price declines, the possibility of a takeover must increase. In my mind these four factors by themselves underpin the current share price. The risk at 12 cents has been reduced considerably.

In July, RBC estimated the Strike’s Western Australian assets at 3 cents. Shell is currently 66 days into its Palta 1 exploration well which is reported to be costing between $60 to 80 million. The drilling is expected to take 60 to 90 days. Because of Strike’s close proximity, one would expect the anticipation of success to have some effect on STX’s share price. Success at Palta would cause an upward spike in the share price, but I sense that if it is not a success, there will be no downward pressure below the current price. Each 1 cent rise in price, offers the risk takers an 8.5% per cent return. In my mind Palta 1 offers the possibility of share price improvement with virtually no downside.

Finally, Bigham 1. The current share price reflects the perceived disappointment of Bigham 1. However Bigham 1 IS producing 200 bbls per day and 450 Mcf per day. With the installation of the lining and the gas lift, one would assume that the bbls per day and/or the Mcf per day will improve. How much will another 100 bbls per day affect the share price? 200 bbls? 300 bbls?

While nothing is guaranteed, I can’t shake the thought that at this price each 1 cent adjustment equates to 8.5% return. Not a bad return when calculated over a month or two.

Cheers.