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Treasure Chest: Strike Energy

Treasure Chest | Oct 19 2023

This story features STRIKE ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: STX

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Rudi Filapek-Vandyck

Whose Idea Is It?

Analysts at Euroz Hartleys

The subject:

Small cap Strike Energy ((STX)) is Euroz Hartley's Highest Conviction idea inside Australia's oil and gas sector, with the broker identifying five "compelling reasons" why investors should consider the opportunity at hand.

More info:

Strike Energy offers a pure-play exposure to the Perth Basin, operationally, and to domestic gas prices in WA on the clients/demand side.

Exposure to WA gas is cited by Euroz Hartleys as one of the compelling reasons in favour of its thesis. Last month the WA spot gas market rose to an all-time price point of $11.69/Gj, the broker points out.

Gas is extremely important for WA and forecasts are for a significant future supply gap for the state.

Strike Energy's maiden asset in production, Walyering, runs on low operational expenses and thus provides the operator a high margin. There is potential to ramp up to nameplate capacity over the current quarter, the broker highlights.

Strike Energy is currently in the process of consolidating 100% ownership of the asset through the acquisition of partner Talon Energy ((TPD)) -that's reason number three. Management has a strategy of adding up to three additional sources for gas production by end 2025 – so watch this space!

The company is on the verge of transitioning to a predominantly reserves-weighted portfolio following the appraisal of fully-owned South Erregulla.

The broker points out Strike's partner in West Erregulla, Warrego Energy, has been acquired earlier in the year for circa $440m by Gina Rinehart's Hancock Prospecting. Applying similar financial metrics to Strike Energy generates a portfolio value of around $2bn, which translates to circa 80c per share.

Today, Strike Energy shares are trading at 43c. For good measure: Euroz Hartley's price target has been set at 62c, well below the Gina Rinehart referenced valuation, but still well above the current share price. The broker has a Buy recommendation for the stock.

Other brokers covering the company seem equally enthusiastic

Wilsons last updated last week, with an Overweight rating and 54c price target. This analyst too is excited about the company's low cost, "valuable" developments, with more drilling and more production volumes on the horizon.

The same observation can be made for Bell Potter, Buy with a price target of 58c, and for Macquarie, Outperform with a 59c target.

The one analyst with a lower valuation is Ord Minnett, whose target is set at 45c, accompanied by a Hold rating.

Shares in Strike Energy started to attract investor attention throughout 2018 and 2019, but they have genuinely embarked on an uptrend since 2020 with the share price launching off 12c and more than tripling over the three years since, albeit with lots of volatility along the way.

On current consensus forecasts, the losses from the past should be replaced with profits, starting the current financial year, with strong growth projections for the years thereafter. Given the small size of the company (market cap $1bn) and the inherent volatility for energy markets, investors better not expect a straight trajectory for the share price, regardless of management's execution and achievements ahead.

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