If the SP's of both STX and WGO continue to under-perform into...

If the SP's of both STX and WGO continue to under-perform into the first half of next year it will be interesting to see how both companies respond. As an STX holder I'm very relaxed on the 6-12 month outlook because of the considerable amount of activity planned across their extensive Perth Basin permits.

STX have 8 permits in the Perth Basin and are operator in every permit, which is fabulous and gives them total control over their destiny and planned expenditures. The next two months are likely to be relatively quiet on news flow but from February through December next year we can expect regular and high impact news flow, especially the 3D seismic.

With the WGO AGM this week we should get some idea on their plans, although in the Perth Basin they have only one permit (EP469) operated by STX. With STX raising $30m, primarily for the Perth Basin, will be interesting to see when WGO go back to the market for the huge chunk of capital they will need to keep up with EP469 commitments.

Had to laugh at some of the mickey-mouse analysis suggesting that WGO was a better bet than STX in the Perth Basin. Of course hope that both companies do well but it's a bit far-fetched to suggest that WGO will outrun STX.

The primary reasons why holders of STX should look forward to 2020 are:

- 8 permits in the Perth Basin (all as operator)
- play diversity across the Basin
- dynamic CEO and very talented technical team that backed their analysis with the WE2 well
- huge Perth Basin knowledge that continues to grow
- had the foresight to buy UIL for a song, which could be prospective for a multi-tcf resource which they own 100%. The first 3D seismic on the ex-UIL permits to occur during 2020. If the results point to high probability targets, then this could be massive or STX.
- fully funded for a very expansive 2020 Perth Basin work program
- quality Board with some serious big hitters, particularly in WA business circles

We have regularly heard from Rexsh and Mir just how important it is to be operator and also the potential across the UIL permits - Wagina/Kingia/Highcliff.

Notwithstanding all the above positives for STX, it could still be in both companies' interest to consider a merger. There are several key attributes that make a resource a potential Tier One asset. In commentary on, for example BHP, the following have consistently been mentioned as essential to be called Tier One:

Large (scale)
Long-life
Upstream
High-margin (low cost)
Expendable
Operator

At this stage, neither STX nor WGO could claim the above in the Perth Basin. Only STX can get there because they are operator and have a huge potential runway across the Perth Basin, especially the northern permits. Merging the two companies could give a nice kick along as a combined entity to progressing towards Tier One ambitions. The bigger the resource an entity ultimately controls in the PB the more they will be able to favourably get into the gas supply conversation - be that domestic or export. Right now I sense the market thinks neither group has enough market muscle. Only size and potential scale solves this!

It will be interesting, if WGO's SP remains well below the last raising ($0.29) to see what they do. It could become very messy trying to raise $20m in the current climate without all the obvious attributes STX have in the PB. Of course they could try for a takeover - might get a very tidy uplift but without operatorship and no other permits in the Perth Basin 'hot' runway, they might not.

The other WGO option could be the merger path with STX. In summary, if neither party offered the other a premium (nil-premium merger transaction; no cash) there would be a scheme of arrangement where STX acquires WGO with the consideration being shares in STX. The notional effect of this on an asset basis, based on current market caps of both would (approximately) be:

STX would go from 50% to 67% of EP469
WGO would go from 50% to 33% of EP469
STX would go from 100% to 67% in all 7 other Perth Basin permits
WGO would go from 0% to 33% in the 7 Perth Basin permits currently fully owned by STX

It's an interesting potential dynamic and could be in both companies' best interests. WGO can either do nothing and raise more capital, try for a takeover, or merge and ride the potential huge value uplift of being part of a whole of Perth Basin play.

If WGO just sit still, because of all the inherent advantages that STX have in the Perth Basin (per above) I expect the market capitalisation ratio between the two companies to widen significantly in 2020 - in STX's favour. Therefore a merger in 12 months time, if the ratio does widen, would see STX end up with way more in % terms, of all permits, compared to a merger today.

Whatever happens, let's hope it all works out for both companies and all shareholders do very well in 2020.

Cheers

Adaltiora