Event Strike is not a company to waste material news for a Quarterly Report, so it was no surprise to read through a summary of events through the recent transformational quarter, which we have previously commented on and modelled. There was, however, some very material commentary on the state of the domestic gas market following the sanction of a giant industrial project. Perdaman sanctioned its $6 billion urea project on the Burrup Peninsula which will produce 2.4 million tonnes each year. For those following STX over the past few years you would be well aware that hydrocarbon gas is the major component of urea manufacturing. Perdaman and Woodside executed a long-term gas sale and purchase agreement (GSPA), which became unconditional when Perdaman sanctioned the project. The GSPA is for ~130 TJ/d of gas over a term of 20 years starting from 2026/2027 (Source: Woodside). This amounts to ~900 PJ of gas that AEMO, the domestic gas regulator, was forecasting to supply existing industrial users of WA domestic gas in their base case supply forecasts. Impact Current average pricing for WA domestic spot gas is the highest on record (since 2009), following a trend of rising pricing since lows of $2-3/GJ in 2019/2020 to >$8/GJ at present as a result of a lack of investment in new domestic gas supply over the past decade. With ~50% of gas contracts to be renewed over the next 2 years (source: AEMO), contracted gas pricing could be up 2-4x, particularly with Perdaman's ~900 PJ of gas being taken out of the domestic gas pipeline. Strike is 1 of only 3 remaining Perth Basin independents, being in by far the best position with 981PJ of independently certified discovered resources. STX plans to convert a large portion of the 2C Contingent Resource (and potentially 2U Prospective Resource) to 2P Reserves over the next 18 months with 5 exploration and appraisal wells to be completed as future producers, with a target of production from up to 4 sources by end CY 25. Action Strike remains the standout player in the Perth Basin with recent developments putting even more pressure and importance on future supply into the WA domestic gas market. STX is well-placed to take advantage of the increasingly attractive WA domestic gas market and likely higher pricing into the future. Its current position, and the potential for the company to become the largest reserves holder in the basin following the drilling program over the next 12 months, makes it a potential takeover target for existing or planned industrial users of WA domestic gas desperate for security of supply/pricing. We have a Buy recommendation and Price Target of $0.60/sh. Catalysts - First gas production and cashflows from Walyering (expected in next few weeks)
- Appraisal success at South Erregulla (target drilling from July)
- Exploration success at EP469 (target end CY24/early CY25)
- Further exploration/appraisal disappointment in Perth Basin (i.e. MIN/NWE, BPT/Mitsui)
- Further increase to WA domestic spot gas pricing (impact on future contract pricing)
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