An emerging petroleum play with a rapidly growing presence in the unconventional energy sector in South Australia’s Cooper Basin, where a company-making fraccing and flow-testing program is underway.
| Corporate Details | .png) |
| Status: Emerging Producer | |
| Size: Small Cap | |
| Commodity Exposure: Oil & Gas | |
| Share Price: $0.135 | |
| 12-month Range: $0.09 – $0.15 | |
| Shares: 833m, Options: 41m | |
| Top 20: 43% | |
| Net Cash: $11.7m | |
| Market Value: $112m |
| Key Parameters | Rating (✓out of 5) | Quarterly Statistics |
| Management Quality | ✓✓✓✓✓ | Q2 2015 Exploration & Dev’t Spend: $3.41m |
| Financial Security | ✓✓✓✓✓ | Q2 2015 Administration Spend: $1.7m |
| Project Quality | ✓✓✓✓✓ | Exploration Spend 67%, Admin Spend 33% |
| Exploration / Resource Potential | ✓✓✓✓✓ | Q2 2015 Forecast Exploration Spend: $5.731m |
| Project Risk | ✓✓✓✓✓ | Q2 2015 Forecast Admin Spend: $1.11m |
We introduced Strike Energy to our Portfolio back in March 2012 following a series of very positive introductory meetings with Managing Director, David Wrench, where the company’s commercial potential was apparent. Strike has undergone a major rejuvenation over recent years, comprising a revitalization of both its board and its management teams, along with a diversification away from its prior focus on USA petroleum activity. The company’s primary focus is now its hugely prospective Cooper Basin gas acreage.
The unconventional energy space within Australia does have enormous potential, but there are clear geographic and commercial considerations. Strike has deliberately targeted projects within specific locations of South Australia’s Cooper Basin, based on important fundamentals: firstly, their proximity to essential energy infrastructure and growing energy markets; and secondly the comparatively low-cost of exploration, appraisal and production activity, based on what are relatively shallow reservoir targets.
In our view, Strike Energy is one of the most attractive ‘unconventional’ energy plays available to Australian investors, something that’s reflected in the methodical manner in which it has firstly identified its acreage, undertaken meaningful exploration activity, signed up cornerstone gas customers – and is now appraising the commercial potential of its gas resources. The benefits of such a careful and rigorous evaluation process are becoming apparent by way of a steadily appreciating share price over the past two years.
Recent Activity
Strike’s steady share price appreciation is reflective of technical success with respect to its drilling, fraccing and flow-testing programs within its Cooper Basin acreage. Bear in mind too that this price performance is further enhanced by the fact that the junior resource sector (and particularly the petroleum sector) has performed poorly in a general sense over recent years.
Strike has adopted a methodical approach to acreage selection, along with exploration and appraisal activity, and it has signed up significant cornerstone gas customers – which provide a strong level of confidence in its commercial prospects. The current flow-testing program is going a long way towards demonstrating commerciality of Strike’s PEL 96 & 94 gas resources.
Program Status
The workovers of the Klebb wells required for the Phase 3 flow-test program have reportedly progressed well, with flow-testing of Klebb 2 underway following completion of the frac program and installation of pumping infrastructure. The frac at Klebb 3 has been successfully pumped and the well is currently being completed for recommencement of flow-testing by the end of July.
At Klebb 1, all down-hole equipment has been installed and the assembly of the beam pump at surface is well underway with commissioning currently scheduled by 1 August. The table below summarises the fracture stimulation treatments that have now been pumped in the Patchawarra Vu Upper zone at each of the three Klebb wells.
The Klebb 2 and 3 fracs are approximately two to three times the size of the original Klebb 1 frac and are designed to substantially increase the productivity of these wells. Flow-testing of the three wells together will accelerate reservoir pressure reduction around Klebb 1 allowing the full productive potential of the reservoir to be validly tested over coming months.
The fracture stimulation program has been completed within budget and with pleasing improvements in design, execution and costs achieved. The early flow-back results at Klebb 2 are encouraging and confirm that well productivity has been substantially increased following the fracture stimulation treatment, with gas flows to surface already achieved.
The completion of the Klebb 2 and 3 fracs brings the tally of successful results to 6 out of 6 stages pumped within the Patchawarra coals. Flow-testing of all three Klebb wells will be underway over coming weeks and is on target to demonstrate the commercial potential of our multi Tcf gas resource.
Planning and conceptual design work has advanced for a demonstration gas processing facility that will be designed to produce sales gas. The deployment of a modular, demonstration processing and compression facility will provide invaluable information to support the development of a commercial scale project within PEL 96 that will deliver gas through existing pipeline networks into the innovative off-take agreements already in place with Orica, Orora and Brickworks.
Initial Orica Gas Prepayment
Strike recently advised that Orica Limited’s wholly-owned subsidiary, Orica International Pte Ltd, elected to make the first pre-payment of $7.5 million under the terms of the existing 250PJ Gas Sales Agreement (GSA). The decision follows the recent completion of an Independent Review of the Southern Cooper Basin Gas Project (SCBGP) by DeGolyer and MacNaughton, a leading petroleum industry consultant. The review previously defined a significant contingent gas resource and clear pathway towards commercial development, effectively validating the significant project de-risking achieved by Strike since July 2013.
We believe the commercialisation of the Southern Cooper Basin Gas Project will accelerate, given Strike now has the operational and funding capacity to achieve commercial gas-flow rates at the Klebb and Le Chiffre pilot wells, as well as undertake pre-development activities into 2016.
Strike has accelerated the Phase 3 flow-testing program – comprising the Klebb Pilot test, including the fracture stimulation and flow testing of the Klebb 2 and Klebb 3 wells. Fracture stimulation will be undertaken during June, with flow-testing of the upgraded wells continuing throughout the September quarter. The objectives of this phase of testing are to accelerate achievement of commercial gas flow rates, along with initial gas reserve certification.
Strike will also progress Phase 4 of the program – which will involve the drilling, fracture-stimulation and completion of additional wells at the Le Chiffre location – upon completion of the Phase 3 program. Importantly, Strike has reported that it has been able to significantly reduce the overall cost of both the Phase 3 and 4 programs, via a series of operational, procurement and logistics initiatives. Strike’s current cash position (including the Orica and Orora prepayments), along with the expected R&D tax refund – will now comfortably fund these activities.
Certified Contingent Resources
In our prior coverage we have discussed that leading international petroleum industry consulting firm, DeGolyer and MacNaughton, had independently certified contingent gas resources within PEL 96 for the initial zones that have been flow-tested within the Le Chiffre 1 and Klebb 1 wells.
The Contingent Resource has been estimated using probabilistic methods, with reservoir data acquired from all four of the Le Chiffre and Klebb wells incorporated into the original gas in place (OGIP) calculations. Recovery factors derived from numerical simulation were then applied and the resulting volumes have then been adjusted for non-hydrocarbon fractions and an allowance for fuel gas.
For the contingent resources to be classified as reserves, establishment of sustained commercial gas flow rates from the Patchawarra Vu coals will be required in order to better define gas and water production rates and volumes, drainage pattern and well spacing. Additional drilling will also be required to confirm the reservoir quality and gas content of the coals outside of the existing contingent resource areas in order to grow and upgrade the resource to reserves.
DeGolyer and MacNaughton has estimated a threshold economic field size (TEFS) of 150 Bcf of sales gas (gross) which is the minimum amount of gas required to be recovered to underpin a commercial development. The TEFS estimate was based on actual cost data and indicates that the existing 2C sales gas volume of 155 Bcf will be sufficient to underpin a project development.
The completion of the DeGolyer and MacNaughton independently-certified contingent gas resources has obviously had a major impact on Orica’s decision to make the first $7.5 million pre-payment under the terms of its 250PJ Gas Sales Agreement (GSA).
Importantly, the project already satisfies a range of other typical contingencies including low well costs, gas sales agreements, proximity to pipeline infrastructure and market pricing. Furthermore, as the current zones only represent a portion of the net coal encountered at these locations, successful flow testing of additional zones will enable an increased contingent resource to be booked.
The review has importantly confirmed Strike’s assessment of the results of the drilling and flow-testing work undertaken so far, in particular the existence of high gas saturation and gas content, along with the productive potential of the coals.
The initial zones have been flow tested that have been assigned contingent resource estimates represent just 30% of the net coal observed within the Le Chiffre 1 and Klebb 1 wells. Successful flow-testing of additional zones in the wells will allow additional contingent resources to be booked at these locations.
Furthermore, Strike has increased the Phase 1 area to 45,500 acres – based on revised mapping of the coals following recalibration of seismic data to drill results. Given that the contingent resource estimates have been assigned to an aggregate of around 6,000 acres within the Le Chiffre 1 and Klebb 1 areas, there is considerable scope to increase the size of the contingent resource with planned infill drilling.
Upcoming Activity
The next phases of the PEL 96 appraisal program are designed specifically to convert contingent resources to reserves and increase the project’s resource base. Strike aims to achieve commercial gas flow rates by upgrading the Klebb pilot wells through fracture stimulation of the Klebb 2 and 3 wells, along with the installation of new pumps.
Attention will then turn to drilling and flow-testing of offset wells at the Le Chiffre location, aimed at confirming the commercial production potential of a demonstration project in the pre-development phase. Strike will also drill additional infill wells in order to confirm the reservoir qualities and gas contents of the coals outside of the existing contingent resource areas, which will likely add to contingent resources and reserves.
Project Background
The Cooper Basin has become Australia’s premier location for evaluation of unconventional resources due to the historical hydrocarbon production, extensive geologic database and existing gas processing, pipeline and service infrastructure. Strike maintains one of the largest exposures to the Cooper-Eromanga Basin, comprising approximately 15,000 sq km across its seven permits.
The Cooper Basin is known as Australia’s most prolific onshore hydrocarbon region. Since the 1970s, the Cooper Basin has supplied more than 5 Tcf of gas to Australia’s eastern and southern gas markets. The Eastern Australia gas markets are experiencing rapidly increasing gas demand due to the development of LNG for export and higher domestic demand. With limited supplies, some domestic customers have commented on an inability to contract the necessary gas volumes to meet their needs beyond 2015.
Three of the Cooper Basin permits (PEL 94, 95 and 96) are on the southern flanks of the Cooper Basin. The southern flank is less thermally mature than the centre of the basin, suggesting that gas may be liquids-prone and may contain significantly less CO2. The projects are ideally positioned to supply the Eastern and Southern Australian gas markets with open-access pipelines passing through the permits.
The current testing program involves the evaluation of a portfolio of five wells, four in PEL 96 (STX 66.6% stake) and one in PEL 94 (STX 35% stake), encompassing a range of completions across the target Patchawarra coal seams. The establishment of gas flows to surface has positioned the SCBGP as one of the few new gas resources, with the potential to supply gas at scale to the Eastern Australian gas markets within the next few years.
The Cooper Basin has become Australia’s premier location for evaluation of unconventional resources due to the historical hydrocarbon production, extensive geologic database and existing gas processing, pipeline and service infrastructure.
Strike estimates that approximately 75% of the 8.2 to 21.5 Tcf prospective resource within this area is associated with the coal. The project is ideally positioned to supply the Eastern and Southern Australian gas markets with open-access pipelines passing through the permits.
Strike’s prime Cooper Basin permits (PEL 94, 95 and 96) are located on the southern flanks of the Cooper Basin. The southern flank is less thermally mature than the centre of the basin, suggesting that gas may be liquid-prone and may contain significantly less CO2. The unconventional resource within Strike’s permit areas is comparatively shallow, meaning that drilling costs are significantly lower than rival unconventional plays within the central portion of the Cooper Basin.
Improving Gas Market Fundamentals
The gas market in Eastern Australia is transitioning from supply-driven to demand-driven conditions, with commercial and industrial gas consumers increasingly concerned about their ability to secure gas supply contracts beyond the 2015/16 start-up of the three Gladstone LNG export projects. Strike’s Southern Cooper basin gas and liquids resource is ideally located to supply gas directly into this market, taking advantage of existing open-access and under-utilised gas pipeline infrastructure.
Summary
Few companies offer investors such high quality exposure to the huge untapped potential of unconventional energy within the Cooper Basin. Most importantly, the company’s exploration and appraisal costs for the foreseeable future are fully funded and it has keen buyers lined up for future gas production. The positive results from the company’s ongoing flow-testing program have flowed through into a robust initial resource estimate. We therefore continue to recommend that investors accumulate around current price levels. The stock has risen steadily from a low of $0.07 two years ago to a recent high of $0.15.
