STX (ASX) Speculative Value

Originally posted by gerfovitch: ↑

The discussion about speculative value triggered some thoughts, which I'd like to share and discuss. Before doing that, I want to disclose that I am a long-term holder of Strike (since 2005) and that I am an economist and by far not an O&G expert - and that I am very bullish still, probably more than ever, but did some benchmarking, which made me thinking that Strike might be valued reasonably high already today (happy to be corrected). Hope you provide me with arguments, why there is still a lot potential in share price in an objective discussion.

My thought are as follows:
Strike was and stil is an explorer, which is why the typical valuation methods are founded on 1-2-3-C/P reserves
Taking this method, it was quite easy to take the 2C contingent resource estimate of 1,185bcf and transform it to company value; most popular and due to its proximity most logical benchmark is the 50% share of Waitsia, which is quite similar to West Erregulla in terms of size and quality (both are world-class caliber)
Waitsia went (including other assets) for roughly 600m AUD (if I remember correctly, Waitsia alone was something around 500m AUD) with 2P reserves of ~0,82bcf, therefore the 500m AUD for the 50% share is a good benchmarking target for the 50% Strike's share
Some said that it went cheap, but it needs to be considered that the final offer was something around 0,9 AUD/share and the bidding war startet around ~0,6 AUD/share (if I remember correctly), thus the initial offer for the 50% share of Waitsia was somewhat around 300-350m AUD, a number that our market cap has already left behind
Plus, it was offered after Waitsia reserves were proved (2P), which is what Strike is doing those days with its appraisal campaign, so it would be fair to say that after we drille WE5 and all wells come up as expected, West Erregulla might be valued at 500m AUD on its own
So, I was thinking, as Strike is transforming itself from explorer to producer, it might be worth looking at prospective revenue and earnings figures and use the standard valuation methods for established stocks (like price to earnings ratio or price to sales ratio)
Doing so, there are a lot of assumptions that may have a big impact on the outcome, e.g. when calculating prospective revenue or earnings, however, I thought it is better to have a ballpark figure than nothing
Thus, I used the expected 50 TJ/day for WE phase 1 and get to a phase 1 revenue of something between 80m-100m AUD (50,000 GJ/day * 5 AUD/GJ * 365 = ~90m AUD/year for Strike - it might be less due to a given discount to Wesfarmers, which we don't know, but this doesn't matter that much for the bigger picture I am trying to paint here)
I was looking at other O&G companies to get a rough estimate about the ratio of sales, earnings and stock price (market cap); e.g. I found that in the annual report released by Senex (SXY) they report revenues of 120m AUD (up 28%), earnings (EBITDA) of 52.5m AUD (up 51%)
Now, the market cap of Senex (today 481m AUD) is quite comparable to the one of Strike (456m AUD) and the current revenue already outperfoms the prospective revenue of Strike's phase 1 (120m vs. 90m), which I assume we might reach not before 2022/2023
However, it is clear that there are many more things to being factored in to come up with a fair market cap value like growth potential, and there Strike's phase 2 comes into play
Strike mentioned in an announcement that phase 2 output of AGIG might be at least 250 TJ/day; to use the same logic as above, this might lead to yearly revenue for Strike of roughly 400-450m AUD, which is a lot as this would lead to a high operating cash flow which could be used to realise the Greater Erregulla vision
However, I haven't found any timeline for phase 2 and I assume that this is targeted more like 2024/2025, so a long time away and a lot of things that can come in our way
I also tried to get a better gut feeling for the real value using price to earnings ratio (P/E) assuming that we have a margin of ~40% (like Senex); knowing that there many, many assumptions in there, we might end up with earnings of roughly 40m AUD in phase 1 and 200m AUD in phase 2
The P/E ratio of Senex (481m/51.5m = 9) is quite in line / slightly below the standard P/E ratios for O&G stocks (I've researched ~15)
So, taking a conservative number of 10, we would end up with a fair market cap for phase 1 of 400m AUD (which we already exceeded) and 2b AUD for phase 2
And here we go, I guess phase 2 can realize Strike's vision to become a multi-billion dollar company - but the road until then is a long one and I assume that we might talk about 2025 the earlierst here
In between of all this theoretical valuation stuff, there is psychology and stock market emotions, plus a lot of drilling excitement and general stock market movement as well as other big drivers (like gas price development in Australia, LNG opportunities as well as the overal status of gas being the intermediate solution to transform from coal/oil to non-fossil energy sources)

Bottom-line, I think that that the market cap valuation of Strike is not low given that we are still an explorer and I simply do not understand how some - even the well-known, experienced and trusted - posters come to a fair share price valuation of 1 AUD or more in the short/medium term. I would really like to understand that better.

However, I think long-term potential is great, the board proved themselves several times already that they are exceptional in ticking off the boxes, there is the Greater Erregulla potential and the sleeping giant in the East. And for use a drilling campaign that will trigger a lot of attention and hopefully good news in the next 6-12 months.

I would like to get your view, if my thoughts are correct or completely off the track and - most of all - I would be really happy to get some thoughts, how the drilling campaign might help us boost the short to mid term value looking at valuation methods.

Ps.: I do not hold SXY or any other stock listed at ASX

Expand

@gerfovitch pretty detailed piece and well articulated... the value for their ground has not been priced nor any upside in the Wagina...What about the rest of the ground? What about the management team? This is a package and it is worth more than the sum of its parts.
For example, WE was bought at $10M for 50%, its now yielded a $400M (using your rationale, I reckon its twice that) asset. The rest of their ground has the same prospectivity. So expect this to repeat. The value here is in the ability for the management team to grow this organically...aka the long game.
If STX persists as an independent entity, it will be a mid tier energy company. As I've said before, its current share price (figuratively speaking) will be its annual dividend in the years to come.

(20min delay)
Last 18.0¢		Change 0.000(0.00%)		Mkt cap ! $515.7M

Open	High	Low	Value	Volume
18.5¢	18.5¢	18.0¢	$641.3K	3.524M

No.	Vol.	Price($)
14	470181	0.180
28	1228739	0.175
20	1480892	0.170
8	732402	0.165
12	1162962	0.160

Price($)	Vol.	No.
0.185	995580	6
0.190	1150837	10
0.195	1337559	14
0.200	3547202	14
0.205	819766	8

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