MoneyTalks: Goldman says Strike Energy still a Buy despite gas...

MoneyTalks: Goldman says Strike Energy still a Buy despite gas well issues, targets 50c fair value

Strike Energy still a Buy despite gas well issues

Goldman Sachs says its recommendation on Strike Energy (ASX:STX) remains unchanged despite Strike’s announcement on February 13 that revealed a problem at one of its gas wells, South Erregulla-3 (SE-3).

Goldman maintains its Buy rating on the stock with a 50c price target, versus the current price of 29c.

Last week, the $845m market-capped Strike reported that it failed to produce expected gas rates during flow testing of SE-3, and that the well may have encountered a gas-water contact within the reservoir.

Upon opening the choke, the well failed to flow but was also observed to be substantially overbalanced. Strike proceeded to plug off the zones and mobilise nitrogen to displace the well fluid, and move the well into an under-balanced state.

The well was then shut-in and a steady increase in tubing head pressure and associated temperature drop was subsequently observed, where bleed offs of pressure/gas were detected as hydrocarbons.

Following this, Strike ran slickline where it observed a fluid level at ~250m from the surface, which indicates that reservoir fluid had been produced.

Strike interprets this as having encountered a possible gas-water contact in the SE-3 well, and as we know, water encroachment usually decreases reservoir life, limits productivity of wells, and elevates safety risks in gas production.

Following the announcement, STX shares sold massively that day.

“We consider the 25% sell-off an overreaction,” said the note out of Goldman Sachs.

Goldman says that it had already assigned a 50% risked weighting on the South Erregulla contingent resources to begin with (up to 271 PJ 2C gas associated with the SE-3 and SE-2 wells).

“While all appraisal activity carries high levels of uncertainty and risk, we are surprised by the interpretation of a possible gas-water contact given petrophysical properties observed in SE-3 were considered similar to SE-1,” noted Goldman.

STX now expects to move to the up-dip SE-2 well, which is ready for production testing, with flow testing to begin soon.

Goldman believes that SE-2 is generally considered lower risk with higher quality reported reservoir properties than SE-3.

“Given the depth being tested [in SE-2] is shallower than SE-3, results could potentially identify the gas-water contact level and provide an improved understanding of reservoir pressure gradients and fluid volumes.”

“We remain Buy rated with our 50c price target accounting for risked conversion of resources to reserves, though look for updates from SE-2 testing to assess South Erregulla resource conversion success.”