Commodities | 10:45 AM
A key obstacle to developing Strike Energy’s flagship West Erregulla project has been removed, while the company’s funding position has strengthened.
- Strike Energy’s West Erregulla development takes shape
- A true ‘win-win’ agreement with Hancock, Macquarie suggests
- Funding pressures ease/capital raise potentially deferred
- De-risked Strike Energy might now find broader appeal
By Mark Woodruff
All else being equal, creating value at a company while reducing the need for a capital raising has historically proved a powerful catalyst for share price gains.
Between 2019 and 2024, onshore Perth Basin gas explorer and developer Strike Energy ((STK)) had created substantial value through gas discoveries at West Erregulla and Erregulla Deep, but unlocking value depended on reaching an agreement with Hancock Energy.
Now, Macquarie believes management has struck a true ‘win-win’ agreement with Hancock, clearing the way for development of the West Erregulla gas field in Western Australia, with additional funding from Hancock a further boost.
Strike will process its gas at Hancock’s Belisama gas plant facility under a capacity-based tolling agreement, while also transferring operatorship to Hancock Energy, the wholly owned energy subsidiary of Hancock Prospecting.
The Belisama plant is only three km away from West Erregulla, reducing pipeline infrastructure requirements and environmental approvals.
Importantly, Strike secures fixed processing capacity at Belisama without funding or building the downstream infrastructure, Macquarie notes, leaving Hancock to construct the gas plant and assume the associated development risks.
Management had previously considered processing gas at the existing Waitsia Gas Plant, owned equally by operator Mitsui and Beach Energy ((BPT)), rather than Hancock’s proposed Belisama facility, which remains at the pre-final investment decision (FID) stage.
Another option was selling Strike’s 50% interest to Hancock, although Macquarie believes this would likely have achieved a less favourable price.
Underscoring the significance of the announcement, RBC Capital identifies West Erregulla as Strike’s principal value driver, representing more than 90% of this analyst’s net asset valuation (NAV).
Additionally, a new $30m loan from Hancock and the accelerated availability of a further $30m in funding will support development and place Strike’s balance sheet on a firmer footing, Macquarie points out.
Strike has interests in three advanced projects: Walyering and South Erregulla, both wholly owned, and the 50%-owned West Erregulla joint venture with Hancock Energy.
The Walyering gas field is currently the company’s only producing asset, having commenced gas sales in late 2023, while Walyering West-1 is an exploration well and gas discovery immediately west of the Walyering.
West Erregulla primarily refers to the established gas resource targeted for development, while drilling of the Erregulla Deep-1 exploration well discovered additional gas within previously untested formations at greater depth.
Both are located within the EP469 joint venture, owned equally by Strike Energy and Hancock Energy.
Funding concerns ease
Macquarie explains the agreement with Hancock delivers two funding benefits for Strike: the previously mentioned new $30m loan from Hancock to support pre-FID activities and early access to Macquarie Bank ((MQG)) funding, increased to $30m from around $23m.
This additional liquidity is expected to remove the immediate need for an equity raising.
Capital expenditure at the South Erregulla 85MW Peaking Power Plant is also subsiding as construction nears completion, the broker highlights. Final commissioning is being undertaken following the introduction of gas.
This plant provides exposure to Western Australia’s electricity market through both energy sales and capacity payments, Macquarie explains, with the 2028-29 Benchmark Reserve Capacity Price rising to $488,500/MW.
The investment case is supported by coal-plant retirements and increasing renewable intermittency, while potential capacity expansion could add further net present value (NPV), the broker adds.
RBC forecasts South Erregulla will generate around $20m of earnings (EBITDA) in FY27, rising to approximately $40m at full production in FY28.
June quarter
Strike Energy’s June-quarter FY26 production and revenue missed Bell Potter’s forecasts after the installation of compression equipment caused 27 days of downtime at Walyering.
In researched penned late July, this broker highlighted underlying gas output of 15TJ/day outside the shutdown, up from around 12TJ/day in the prior quarter, demonstrating the benefits of recent infrastructure upgrades.
At the time, management was assessing whether Walyering West-1 could be commercially connected to the existing processing plant following encouraging flow-test results.
Production fell -12% quarter-on-quarter to 0.99PJ, reducing sales revenue by -5% to $13.1m.
RBC noted higher condensate pricing provided some offset, with realised prices rising 61% to $177/bbl and condensate revenue reaching $1.16m despite lower volumes.
Walyering averaged around 10.5TJ/d while operating, with production forecast to recover to around 15TJ/d in the first quarter of FY27 once compression facilities were fully operational.
Walyering West-1 confirmed a new conventional gas accumulation in the Cattamarra Formation, flowing at 11MMscf/d with low 1%-2% CO2 and higher condensate yields than existing Walyering production.
The discovery was not included in RBC’s valuation, with a 15PJ resource potentially adding around 10% to NAV if confirmed.
Domestic Gas Reservation Scheme
In welcome news for smaller Australian domestic gas producers such as Strike Energy, RBC Capital notes the federal government’s proposed Domestic Gas Reservation Scheme appears less onerous than initially feared.
Potentially limiting additional gas entering the domestic market, the 20% domestic supply requirement will be calculated after accounting for existing LNG export contracts, infrastructure constraints and current reservation arrangements, including Western Australia’s 15% policy.
The government estimates LNG exporters could supply up to an additional 200PJ of gas annually, which, alongside domestic production, would be sufficient to meet new manufacturing demand and cover Australian Energy Market Operator’s (AEMO’s) forecast potential shortfall of up to -140PJ.
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