Strike Energy (ASX: STX, Share Price: $0.115, Market Cap: $96m) is our preferred ‘unconventional’ energy play. Strike’s sole focus is on defining the commercial viability and overall resource extent of its emerging Southern Cooper Basin Project, with the ultimate aim of delivering gas under long-term supply arrangements to growing and energy-starved markets in Eastern and Southern Australia.
Strike has advised the successful completion of a $6.7 million capital raising by way of a private placement to sophisticated and professional investors, with the proceeds to be used to accelerate the production testing and pre‐development of the company’s Southern Cooper Basin Gas Project.
Market Significance
The 12-month price chart above is significant because it reflects the robust share price performance of Strike Energy (black line) compared to three other much large energy plays – Beach Petroleum (ASX: BPT), Santos (ASX: STO) and Woodside (ASX: WPL) – which have recorded share price falls of between 30% and 45% over the same period. Strike is one of the few ASX-listed energy success stories at the present time – a reflection of its methodical approach to project selection, proximity to energy markets, exploration and appraisal activity, as well as securing of significant cornerstone gas customers.
Announcement Detail – Capital Raising
Strike Energy has today announced the successful completion of a $6.7 million capital raising by way of a private placement to sophisticated and professional investors.
The placement comprises 67 million new ordinary shares to be issued at $0.10 per share, which will raise $6.7 million (before costs). The placement price of $0.10 per share represents a 13% discount to Strike’s ASX closing price on 1 April 2016 and an 18.4 % discount to the 10‐day VWAP.
The placement shares will be issued in two tranches – with 65,300,000 shares (Tranche 1) to be issued within the company’s 15% placement capacity – whilst a further 1,700,000 shares (Tranche 2) will require shareholder approval.
The proceeds from the placement will be used to accelerate the production testing and pre‐development of the company’s Southern Cooper Basin Gas Project.
Klebb Production Testing Update
Strike recently provided a positive update with respect to operations within its Southern Cooper Basin Gas Project in PEL 96 (Strike 66.7% stake and Operator, Energy World Corporation (ASX: EWC) 33.3% stake) in South Australia.
In summary, production testing observations have confirmed that reservoir pressure reduction has initiated gas desorption, with increasing gas flows measured as reservoir pressure is further reduced and the low pressure zone expands away from the well, allowing more coal to start producing gas. This is consistent with conventional coal seam gas systems; however, it is important to note that the SCBGP coal seams are significantly thicker than most other CSG resources (up to 150 metres of net coal).
The most encouraging aspect of production testing over recent months has been the immediate and rapid build-up in gas flow rates while water production is maintained above a threshold rate. This indicates that the average reservoir pressure around the Klebb wells of around 2,300psi is approaching the average critical desorption pressure.
Strike reports that whilst gas ramp up rates have been very encouraging, flows are currently limited by the capacity of the Klebb 2 and 3 jet pumps to handle the increasing gas volumes. The gas production potential of the reservoir will only be fully tested as these engineering constraints are progressively removed via upgraded and enhanced gas lift systems.
The overall ongoing testing program is focused on continuous improvement to progress through threshold commercial gas production rates towards flow rates that can conclusively demonstrate the compelling economics and scale of what is a massive gas resource.
The Klebb 1, 2 and 3 wells represent the SCBGP’s 1st and 2nd generation wells and have delivered progressive improvements in gas flow rates with further increases expected following the current pump upgrade program.
Klebb 4, the project’s 3rd generation well design, has significantly increased productive capacity due to a larger casing diameter, increased frac size and new pump type. Klebb 4’s design changes are low risk, incremental improvements based on direct experience gained from the Klebb and Le Chiffre wells.
Generation 4 and 5 wells will incorporate further modifications including increased casing size and pump capacity combined with multi-stage fracs to deliver the full productive potential of the resource.
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.
Summary
We initially covered Strike Energy Resources at a price around $0.10 during October 2015 – representing a gain of 15% so far. This is a particularly good performance when compared against the background of the broader energy sector, particularly the performance of mid-cap and heavyweight energy stocks.
Few companies can offer investors such high quality exposure to the huge untapped potential of unconventional energy within the Cooper Basin. Importantly, the company’s exploration and appraisal costs for the foreseeable future are now fully-funded and it is lining buyers 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 and solid share price performance. Strike Energy will therefore remain firmly held within our Portfolio.
