Strike Energy Ltd

ASX:STX

Earnings Call Transcript 2025-Q1

[Emma Alexander, executive]

Hi, everyone. Thank you for joining us today for Strike's Q1 FY '25 Quarterly Results. We've had a really big and awesome quarter, some cool things going on with flow testing results and some major project milestones. So, I'll let Stu take you through the results. And then at the end, we'll have a Q&A session like normal. [Operator Instructions] We do have a 9:30 hard finish today. So, if there are any questions that we don't get to, I'll try and go through and get back to people via e-mail if their e-mail is here or feel free to give me a call or an e-mail yourself.

Over to you, Stu.

[Stuart Nicholls, executive]

Thanks, Emma. No worries. We'll just get straight into it then. Thanks, everyone, for joining today at Strike's Q1 FY '25 quarterly results and activities report. It's been another busy quarter at Strike. The quarter itself was highlighted by several key project milestones as well as a couple of discoveries as well and solid production coming out of Walyering. Importantly, the Walyering facility produced at around 2.31 petajoules equivalent of gas and about 16,000 barrels of condensate for about 2.4 PJs, all up. So, production was up 2% quarter-on-quarter. Unfortunately, due to some foreign exchange-related issues as well as some lower nominations across some of our as available portfolio, sales revenue was down 8%, but it was still a pretty strong quarter with $18.3 million of cash generation.

Major developments across the portfolio, the South Erregulla peaking gas power station, which is a project that continues to go from strength to strength was awarded its full network access quantity and 85 megawatts of reserve capacity credits for the '26-'27 year coming online in late '26. Those capacity credits were priced at the -- towards the upper end of Strike's expectations at around $216,000 per megawatt per annum, resulting in a fixed government-backed revenue stream for the first year of operations of $18.3 million outside of any energy sales and emergency services that the facility may provide.

We also had 2 discoveries in the quarter. We successfully flow test the Walyering-7 discovery at Walyering. That went into the plant, obviously, avoiding avoidable carbon emissions as well as generating revenues into the facility. That flow test resulted in a maximum rate of 14 TJs a day and up to 900 barrels a day of condensate. The tie-in of that well is largely complete. We're just waiting for our vessel inspection and annual shutdown to conduct the final electrical tie-in before starting that well up. We also, as you -- which has garnered quite a lot of interest, made a major discovery at Erregulla Deep, which is about sort of 5 to 6 kilometers to the east of the West Erregulla gas field. That well is the deepest well ever drilled in onshore Australia and it's yielded some absolutely profound results, and I'll take you through a bit more detail of that in the next few slides.

The West Australian Domestic Gas Policy update concluded this last quarter. And positively, the status quo was broken for Strike with the lifting of the export ban. That means that Strike will now be able to export 20% of its natural gas production via the existing LNG facilities in Western Australia and we'll be able to do that until 2031. That is whilst a small allowance for Strike, is actually a material outcome for revenue generation over that window. One of our other major projects, the West Erregulla gas project that we share 50-50 with Hancock Energy, we received the first production license at L25 and that project continues to move towards its final investment decision, which we are targeting for later this year.

And moving on to the actual financial results. As I said, total revenue generation for the quarter was $18.3 million. Realized gas prices were somewhat lower than last quarter, down from $7.80 to $7.04, mainly due to foreign exchange as well as lower condensate pricing related to oil prices dropping during the quarter. Expenditure for the quarter primarily was associated with the drilling of Booth-1, Erregulla Deep, the flow testing and the final receipts for the drilling at Walyering-7, as well as the construction operations at Walyering to tie that Walyering-7 well in. We also started some of the minor surface rehabilitation at PEL 96 in South Australia as we start to close out that portfolio on the Eastern side of Australia.

The balance sheet, however, remains strong. We drew down on some of our undrawn debt. We have currently $59 million of drawn debt from our $76 million of facilities and we are working through final financing documentation with Macquarie Bank to unlock that $153 million financing package, which will support the final investment decisions at South Erregulla's peaking gas power station, which is due for next month and the West Erregulla gas development with Hancock.

Just talking about how the portfolio is starting to change. We now -- as you can see on the map, we're now not only just putting the pipelines on this map, we're now putting also the transmission network. We do see Strike evolving as a material producer of gas-fired electricity over time. The first phase of that South Erregulla gas project, peaking gas project, 85 megawatts is a great sized project using gas reciprocating engines, fairly technologically robust project, not a lot of new technology being used there, but that does allow us to work our way into that segment. So, Strike is sort of starting to evolve as a great exposure of the West Australian energy transition.

Not only are we supporting the industrial gas markets through domestic gas sales, but soon, we'll be generating electricity into that West Australian wholesale electricity market. And as we start to bring the larger West Erregulla volumes online, we're hoping to have some LNG exposure as well. So, 3 different diversified product streams, all with their own volatilities. And I think that, that is forming as a really exciting investment exposure to our shareholders over the coming decade.

The company itself, as we've made that major discovery at Erregulla Deep, which we are in partnership with Hancock at, we currently are sort of using about the 2U estimate as a fairly fair range for expectations as to how material that may be. As you can see on the chart in the bottom right-hand corner of this slide, Erregulla Deep conversion of 2U to 2P/2C will be a meaningful increase in the company's total reserves and resources position. That well performed exceptionally on flow test and we have a little video here. As you can see, the well, deepest well ever drilled. We've got reservoir pressures in excess of 7,600 psi. The Kingia is so strong that, in fact, it was backing out the High Cliff gas discovery. Obviously, reservoir quality a little bit lower there. And therefore, the drawdown, which was only about 270 psi from shut-in wellhead pressure, really, really intense flows that you can see.

The absolute open flow of the well itself was measured between 400 million to 450 million standard cubic feet and the well itself stabilized very, very comfortably at 53 million standard cubic feet with an enormous flowing tubing head pressure of 5,515 psi on a small 4,664 choke. To put that in perspective of other wells drilled in the basin, that is Lockyer Deep, which was a great flow test from mineral resources discovery, a little bit to the northwest of Erregulla Deep. This well at Erregulla Deep is flowing at the same rate on a smaller choke with over 1,000 psi more flowing tubing head pressure. To put in perspective, just the quality of the result that we have generated here given the amazing impact that Lockyer discovery and that initial flow test had on Perth Basin prospectivity.

But another part of Perth Basin prospectivity and very well received by the other neighboring operators around us is that we've opened the play at depth. We've proven that the porosity preservation mechanisms of the Kingia Sandstone are now working at depths of 5,000 meters, 4,800 to 4,900 meters through vertical depth subsea, which is a fantastic extension at depth of this play. We do think that the Erregulla Deep well will have an impact on the West Erregulla reserves position. And so right now, rather than looking to rush a reserve resource booking at Erregulla Deep, noting that the Northern end of L25 and EP469 is covered in legacy 2D seismic, which we've had reprocessed, but is still not at the level of definition that we are comfortable.

We're shooting the 3D seismic -- the Natta 3D seismic, which is fully approved by the joint venture and by the regulator. That 3D will be shot over the harvest period. We expect the crop to be lifted December, January sort of period of time, and then we'll shoot that 3D seismic. That will give us a very high-resolution understanding of the Erregulla Deep structure and the impacts that we'll have on the Northern end of the West Erregulla gas field. At that point in time, we will conduct an independent reserve and resource assessment of -- and potentially, what are the impacts at West Erregulla as well from Erregulla Deep and we expect to convert some [ R2U ] to 2P/2C before the end of the financial year. So, really exciting outcome there and I think very material in the scheme of the overall reserve and resource position of Strike in the Perth Basin. No one has found more conventional gas in Australia in the last 5 years than the team that we had here at Strike.

Another great impact of Erregulla Deep is that it has opened to play out to the East. For those that have been following the story for quite some time, we've always hypothesized the sedimentary input direction is coming from the Northeast with the sand coming from the Northwest. So, this is -- we're actually looking to find a further extension of what appears to be a sweet spot in the play. We're very fortunate that Strike has a commanding 100% owned position across EP503 and 504, as you can see at the Arrino and Kadathinni structures out to the Eastern side.

We have recently shot 479 kilometers of brand-new 2D seismic. We've got 2D tie lines across to the West Erregulla field and Erregulla Deep. So, we can map that seismic now across the Dandaragan Trough and back up to the first terrace on the Eastern side. Positively, we're seeing great prospectivity from 4,000 meters and deeper from the Triassic all the way through to the Permian. And we're really looking forward to continuing to interrogate that seismic and see what we can pull out of that to higher start to high grade those leads into prospects and potentially look to conduct some exploration activities in the future.

On to one of our flagship projects and something that I think is somewhat underestimated and its financial impact to the company is the South Erregulla peaking gas power station. I think it's surprised a lot of market participants at the speed and the quality that Strike has been able to convert and pick itself up off the floor from the South Erregulla appraisal results and convert its domestic gas project to a peaking gas power project. We participated in the first round of the new capacity credit mechanisms rules that the AEMO have rolled out. I think that this project is an enormously important project to the state of Western Australia, given the role that it will play at stabilizing the Northern end of the South West Interconnected System. And I think that you can see the success that we've had through that regulatory process as just how important it is to the state.

So, we've received the 85 megawatts of capacity credits, our full network access quantity. We've made leaps and bounds. We've signed our generator contract, which is our biggest long lead item and the most important contract for $47.5 million to Clarke Energy for our Jenbacher JS-24s, 4.5 megawatt engines, 20 of those coming out of Austria. They're fantastic pieces of kit. They have high efficiency, very fast start-up times and are perfectly designed for peaking gas power.

I think we can see from what we're starting to observe in the West Australian electricity market that peaking gas power is going to provide an increasing important role in Western Australia as the government continues to firm on its commitment to exiting coal-fired power down at Collie. I think it was the Collie Muja C unit that was not allocated capacity in this last capacity round. And I think that is evidence to demonstrate the state government's commitment to exiting coal-fired power here in WA and increasing the rollout of renewables batteries, which obviously requires a meaningful amount of peaking gas power to firm that. So, we expect to see a greater amount of volatility moving in to the market.

I think the revenues that we're starting to forecast are closer towards the more upper end of our range. Certainly, the capacity prices that we received of $216,000 per megawatt per annum is at the upper end of our forecast of $180,000 to $230,000. This facility will now be eligible for capacity credits every year of its operation. We expect the West Australian government to operate a capacity market for over the next decade to come, similar to the way that the U.K. is operating its electricity system, which means that this is a very, very high creditworthy cash flow stream that is coming into the business and forms a great foundation of financial architecture for us to be able to deliver capital back to shareholders in the form of buybacks, dividends and continue to explore on a discrete basis to continue to replace our reserves.

The peaking gas power markets, we see it as a great place to deliver our gas into. As I said, rising prices of power in Western Australia as that coal becomes a little bit more unreliable and we continue to roll out our renewable penetration. But we do see it as a premium to the industrial gas markets where that spark spread conversion of gas to electrons can yield a premium price for our product. And noting that as we move into the coming decades, the reserves replacement from our traditional sources of gas in Western Australia up in the Carnarvon Basin has not been occurring at the rates required and we expect to see people like Strike and other Perth Basin participants be a very important part of West Australia's energy system going forward. And we have secured our access into the electricity market. We're a first mover in that. I think we've got other oil and gas companies in Australia that are indicating their interest in peaking gas power. We're not thinking about it. We are doing it, and I would like to congratulate my development team on being a strategic cycle ahead of the rest.

So finally, just getting to where we are for the year. You can see we've actually had a great year in terms of delivering against the catalysts that we had forecast after the South Erregulla appraisal results. We do have some drilling coming up in the next quarter. We're starting to move into a lower capital spend of discretionary activities. Walyering East is the final exploration well of our gas acceleration strategy. And then we move into some pretty hard 18 to 24 months of construction across the South Erregulla peaking gas power station as well as West Erregulla.

So, Walyering East due to spud around the end of the month and looking to tie that well in to really take advantage of some of the trading opportunities that will be made available to the company through Walyering being connected to the DBNGP sometime in the first quarter of next year through the Mondar crossing that we signed with APA a bit earlier in this year. So that's end of a great quarter, production steady, reliability of the facility fantastic. Can't control the foreign exchange, unfortunately, but it does look like Australian dollar has weakened a little bit recently. So that should come back to the fore and looking forward to moving into that second and third leg of our gas acceleration strategy as we move into significant cash generation from 2027 onwards. And I think that shareholders should be aptly rewarded for their patience.

Back to you, Emma.

[Emma Alexander, executive]

Thanks, Stu. So, we've got a few questions coming through. And one -- the first one is from [ Richard Cook and Matthew Walker ]. So, pointing to in February in Chairman John Poynton's letter, that we take full responsibility for the setback and are committed to restoring value to the company and our shareholders, but the share price at that time was $0.21. And today, the share price is $0.21. What measures are the Board taking to address the share price, especially seeing as they thought it was index rebalancing was partly responsible via shorts and that seems to have come and gone?

[Stuart Nicholls, executive]

Sure. Yes. And I -- as an inherent control person, I'd love to try and think that I could control the share price, but it's unfortunately outside of my control. I think all we can keep doing, Matt and Roger, is that we -- Richard, sorry, Roger would be the premier, is that we keep delivering against our strategy. I mean I can't see how Strike's share price can continue to stay in the trading ranges that it has performed in the last sort of several months or so against the backdrop of the successes that we've been having in the field, particularly as we start to derisk our assets, take them into construction and ultimately into production. Just the weight of incoming cash flows will start to make Strike look incredibly undervalued against its peers. And I think even on a resource and reserve multiple, it's currently undervalued against its peers. And I expect Institution Australia to wake up, take notice of that and to start to own the stock again. So, patience is required and we're looking forward to delivering some of those further milestones for the rest of the year.

[Emma Alexander, executive]

Well, Richard has got a follow-on more on the quarterly numbers, which I might be able to answer. Detail the breakdown on the E&E costs and then the oil and gas asset costs.

So, the E&E costs of $9.3 million. That's related to the Erregulla Deep-1 drilling and the seismic. And the oil and gas assets includes Walyering. So that includes the Walyering drill in that $14 million, the Walyering drill and testing and completion.

And then another CapEx question from Matt Walker. There appears to be doubt in the market about the balance sheet and the cash flow with all the planned activity, which is possibly holding down the share price in anticipation of a capital raise. With all the ebbs and flows of the business and your acceleration plans, can you again reaffirm your ability to fund 100% of all planned activities without a cap raising?

[Stuart Nicholls, executive]

Yes, that's right. Thanks, Matt. And good question as well. I think that that's probably the last remaining question mark over Strike's ability to deliver these material projects and future cash flows at what cost. As we start to move through the final investment decisions, you'll obviously see the planned expenditures that we intend to roll out. At this time, engaging with Macquarie, we do not intend to require an equity raise in order to support the financing of those projects. We are going through the credit approval process at Macquarie. But at this point, at this juncture, we expect to see the facilities delivered by Macquarie Bank as being able to support the construction of those 2 projects. Like I said, moving the company into a lower profile of discretionary expenditure. So unfortunately, some of those really exciting moments of deep drilling and exploration and appraisal outcomes will need to take a backseat for a period of time whilst we move into construction, but fully financed through the facilities is the intention of the Board and management at this time.

[Emma Alexander, executive]

And as we move towards FID at West Erregulla, and you've added in the report that you would look to tie in ED-1 as a producer. There is a lot of gas for an 87 terajoule a day plant. So, post ED-1 is the JV considering upscaling the plant?

[Stuart Nicholls, executive]

Yes. So Erregulla Deep-1 has a really low impurity profile and almost pipeline spec quality to that gas. So, we are currently engaging with the midstream operator -- proposed operator, Australian Gas Infrastructure Group, at what would Erregulla Deep gas input into the plant do to the overall throughput of the plant. I'm hoping to hear that and we are yet to hear that the lower impurity gas blended with the West Erregulla gas means that we can potentially upsize the throughput, so to beyond the 87, 90 TJs a day. But we're going through that technical work. We've only just really finished the flow testing and confirmed the gas specification. So, all in good measure.

Obviously, Erregulla Deep may warrant additional expansions of the West Erregulla facilities, but let's get the first train online first and then really understand what an appraisal well at Erregulla Deep could yield and whether that unlocks a second train at West Erregulla or through -- if it is such great quality, do we even need to go through the plant or could we bypass the plant. Just technical questions we're working through right now. Strike, very, very busy on meeting the initial developments. So, let's just sort of all in good time is the way I would describe it, but recognizing there is a closing window for LNG exports, which can facilitate through alternative financing mechanisms, accelerated expansion and so something we're interrogating as well.

[Emma Alexander, executive]

Cool. And I guess a follow-on from that, when will we expect to have updated volumes for Erregulla Deep-1? And is a separate production license required over it?

[Stuart Nicholls, executive]

First bit first. So, Erregulla Deep-1, I think I just went through a little bit earlier to say that there's 2D seismic in the Northern part of EP469 and L25. We see that seismic as good for understanding the approximate structural size, hence, why we're still guiding the 2U as being an appropriate resource for expectation setting. However, we don't want to book a number and then shoot the 3D. And then obviously, the structure changes so materially that we need to de-book some reserves. So, we're going to shoot that 3D seismic in that January-February window and then we will bring those volumes in, assess the shape and the size of the structure, be able to get our gross rock volume and then conduct our reserves upgrade from there. That is all looking to be to try and be concluded by the end of the financial year.

When it comes to the second production license, you can see probably from one of the maps earlier in the pack that the Eastern side of the West Erregulla field sits inside of EP469. So, we had already commenced the conversion of the remainder of EP469 to a second production license. We have been notified of award of that second production license, but we're yet to be awarded the actual instrument, which hazard a guess will probably be called L26. But we're just working through that with the regulator at the moment, but that should allow us to capture Erregulla Deep and that Eastern side of West Erregulla into a further secured tenure. Just on secured tenure, no one has been more successful in the Perth Basin at getting environmental approvals and production licenses over discovered fields in the basin. So, I think you can have a lot of confidence that we do want to put our assets under secured tenure and that we have been very successful and that is our intention going forward.

[Emma Alexander, executive]

Another follow-on. So, you said the Eastern blocks are looking more prospective post Erregulla Deep, which is great. But you also said that you're slowing down exploration work to focus on development and cash flow. What can you tell us about the timing of your plans to explore Ocean Hill, Arrino and Kadathinni to unlock the potential you see there and increase reserves? Is there still a plan drill for Ocean Hill in Q1 '25?

[Stuart Nicholls, executive]

Great question. And yes, those 2 statements can look a little bit contradictory. We are looking at other third-party sources of capital for potential exploration activities over the coming 2 years to 3 years, whilst we are going into that -- drawing down on that debt, constructing those 2 projects and then starting to service that and pay it back. With the unlocking of the LNG access through the Domestic Gas Policy update, that has really broadened the amount of interest in what's going on in the Perth Basin. And as we said to the parliamentary inquiry earlier in the year, the LNG markets of the world are a deeper, more liquid pool of buyers and sources of funding, and that is possibly one way that we are looking at trying to bring some exploration activities into that window without using our balance sheet, so to speak.

[Emma Alexander, executive]

And there's a question around export allowance. So, the quarterly seems to refer as oil production. My understanding is that it's only for newly developed production capacity. So, is for anything pre-FID, so we wouldn't be able to export volumes, for example?

[Stuart Nicholls, executive]

So, I mean that it's a point of discussion going on with the JTSI, Department of Jobs Tourism Science and Innovation, who control the Domestic Gas Policy is exactly how the mechanics work. I think when you saw the Domestic Gas Policy update, this piece of -- this policy change was captured in about a 3-line sentence. So obviously, not a lot of detail behind that. So, we're engaging with the regulator at the moment on exactly how the policy will roll out. Where is the true-up? Is it annualized true-up? Or is it contemporaneous? Is it quarterly? And how do you measure that 20%? Do note that Walyering East sits in EP447, which is an exploration permit outside of the L23 production license that Walyering sits in. So, we do see some very near-term opportunities where we're going to be able to start to bring other volumes into development subject to their own individual FIDs.

[Emma Alexander, executive]

We'll move on to Walyering just for a little bit. There's a few questions that we'll try and get through. What production rate step-up in terajoules a day do you expect for Walyering with Walyering-7 and Walyering East?

[Stuart Nicholls, executive]

So, Walyering-7 surprised us a little bit where a couple of the expected gas sands were very condensate heavy. I think the condensate gas ratios in a couple of those sands were in excess of sort of 85 barrels per million standard cubic foot. So, the current plan at Walyering-7 is to bring it online and to understand exactly the stabilized liquid production rates. I mean I think that the potential range of volumes of condensate that could be produced out of Walyering-7 are really, really broad on an unrisked basis. And so once we bring that well online, we're going to get a really good understanding of where the sweet spot is to liquid production into the facility, knowing that we've got about 1,300 to 1,500 barrels of storage on the facility at the moment.

We want to make some other commitments to alternative commercialization pathways, which may mean that we can produce condensates at higher rates. The condensate rate is going to affect the gas rate and the gas rate ultimately is the one that you're looking for. We're not there yet, unfortunately, to tell you what we think it's going to be. At the end of the first month of production is probably where we'll have a better idea. So, something to come in the following quarterly, I would expect.

[Emma Alexander, executive]

Yes. And then a couple of questions coming in on the condensate, whether there's sort of what is the value of sending the condensate to Port Bonython? And are there possibly other plans for the condensate at the moment?

[Stuart Nicholls, executive]

Yes. So, I guess the breakeven, it's hard to sort of say that there's a breakeven given that it's a byproduct that we can't control its production, sort of comes out with the gas. But the breakeven of the condensates going to Port Bonython, including trucking, Port Bonython costs and Walyering associated costs is around USD 50 a barrel. And so you can see the oil price about USD 75 a barrel today. We want to increase that margin as we start to see an increase of that product coming into the facility. So, we are looking at more localized opportunities where we can deliver more product sooner and potentially expand that margin. So, it is something that the Board has been very, very focused on is how do we get a greater amount of free cash flow generation from our liquids production. And I think that with Walyering-7 coming online, we may tip ourselves across that threshold of daily volume to be able to do something a bit more commercially driven with that product, but something that we will assess, as I said, once we bring that well online.

[Emma Alexander, executive]

Cool. And we might just do one more. There's a question here on what STX's expected required CapEx spend range is for West Erregulla.

[Stuart Nicholls, executive]

Yes. That will come out when we release the final investment decision numbers. With the majority of the well fleet in the ground, it's not a huge number, as you can expect, given that all we have to put together is the flow lines, wellhead systems and tie it all together. So, we haven't disclosed that number at this point in time. So, something that will come out in future disclosures, but it's not material in comparison to the amount of capital that we'll be spending at South Erregulla. So that's the key focus to ensure that we've got great cost control there and we are ensuring that the -- that project is executed as best-in-class as possible.

[Emma Alexander, executive]

Cool. All right. We might leave it there. There's a few other sort of very specific questions that I can answer on e-mail. But thank you very much.

[Stuart Nicholls, executive]

Thanks, everyone. Have a great day.

[Emma Alexander, executive]

Good day.

[Stuart Nicholls, executive]

See you next quarter.