Company Overview - Strike Energy Limited is an Australia-based active oil and gas exploration and production company. The Company is engaged in the evaluation, development and production of oil and gas and energy projects in Australia and the United States of America. The Company operates in two geographical segments: Australia-Exploration and Production, and the United States-Exploration and Production. The Company’s assets include Cooper Basin, Eagle Ford Shale, Permian Basin and the United States Conventional. It has unconventional (shale oil and gas) and conventional development projects in Australia and the USA. The Cooper Basin is Australia’s prolific onshore oil and gas region and is recognized for its unconventional potential. The Company’s permit areas are known to contain hydrocarbon bearing shale, coal and sand formations.



Analysis - Strike Energy Ltd (ASX: STX) has reported a strong march quarter by demonstrating continuous flow tests in its major asset-Southern Copper Basin Gas Project. Meanwhile, the firm’s first contingent gas resource has been certified by petroleum consultants, DeGoyler and MacNaughton during April. The consulting firm assessed that Strike Energy is progressing towards PEL 96 commercialization. STX has also been making several gas offtake agreements with firms like Orica, Orora and Brickworks.

Strong Southern Cooper Basin Gas Project Opportunity

The firm quite recently reported a favorable progress in its Klebb pilot and Le Chiffre project from Southern Cooper Basin gas project (SCBGP). The testing programs have showed positive results, and the wells showed sustained gas flows as well as sustained reservoir pressure. As Strike energy is proceeding to attain commercialize gas flows, the firm intends to continue flow testing to get the required reservoir pressures.


Southern Cooper Basin Gas Project Overview (Source: Company Reports)

Strike energy wants to make its SCBGP a long term resource and is planning development and production activities accordingly. The company estimates to start production from this project by 2017 to 2018.


 Strike Energy’s long term strategy (Source: Company Reports)

Klebb Pilot Project

The communication in between Klebb 1 and Klebb2 has been developed while productivity is enhanced in Klebb 2. Klebb 1 witnessed peak flow rates in excess of 600 bwpd during flow testing operations in April and May. Klebb 3 rates saw an excess of 250 bwpd during these months. These encouraging results reassure that Patchawarra coals are highly productive. During the month of May, injection test was conducted in Klebb 2, which showed superior rates as compared to the prior results. Overall, all three Klebb wells are currently undergoing flow tests and Strike Energy estimates that contributions from Klebb 2 and 3 will continue. As soon as the Klebb1 work is completed, the present flows that are constrained from Klebb 2 and Klebb 3 will be rectified.

The firm has fastened the Phase 3 program to improve production in Klebb pilot wells. Klebb 1 will be installed with a new rod pump to sustain steady production at lower reservoir pressures as well as improve pumping capacity in Klebb 2 and Klebb3. Moreover, production will be improved at Klebb 2 and 3 through fracture stimulation. From June to September, the fracture stimulation of the wells will be conducted by flow testing the upgraded wells. After Phase 3 program, fracture simulation, Completion of further wells as well as drilling activities will be conducted in Le Chiffre project.



Klebb Project’s gas flow (Source: Company reports)




Le Chiffre project

Le Chiffre project is advancing well and is going through an extended pressure build up test. The project has produced over 87,000 bbls of water till date. Strike Energy estimates the buildup test to offer good reservoir data, enabling the testing program to be more sophisticated.
 
Quarterly United States Operation Highlights

Strike energy has interest in The Permian Basin (with STX having 25% interest) as well as in the Eagle Ford Shale and Eagle Landing Joint Ventures (With STX having 27.5% interest). During the March quarter, the production of gas and oil was down by 8% and 14% respectively in its Eaglewood Joint Venture to 71,736 Mcf and 1,306 bbls. The MB Clearfork Project gets oil from twenty conventional Permian Basin wells. This project’s gas production decreased 14% 2,392 Mcf , while oil production improved by 23% to 2,669 bbls, against the same period in previous year. The Eagle Ford Shale Project, which delivers production from Bigham 1H well, showed a decline in both gas and oil production as compared to the prior quarter, by 28% and 15% respectively. Overall, the average realized prices for oil and gas fell 35% and 29% in year over year terms to $46.72/bbl and $2.9/Mcf respectively.


United States Operation Highlights (Source: Company Reports)

Contingent Resource Potential

The independent consulting firm, DeGolyer and MacNaughton, has certified that the Southern Copper Basin Project is making headway towards commercialization, and has also made gas prepayment sale agreements with Orica and Orora. The assessment confirmed that the project demonstrated good 2C contingent resources. Moreover, the resource estimates showed that there is enough gas for commercial development.  The consulting firm’s review also confirmed a decrease in geological risk related to the present multi Tcf prospective resources that were not drilled. 



Contingent Resource Estimates (Source: Company Reports)
 
Funding activities

Strike energy reported a cash of $5.8 million during the March quarter and has entirely funded its flow testing projects. To ensure the smooth operations, logistics and procurement, the firm has been reducing the costs associated with its Phase 3 and Phase 4 programs in Klebb pilot project. In addition, the company's research and development tax refund is expected to provide some support to fund its ongoing activities. STX expects to receive its ATO R&D refund by November of this year.  Meanwhile, Strike Energy has increased the R&D funding facility to $5.9 million as of the end of March quarter. STX expects to receive its ATO R&D refund by November.  Around $4.0 million was initially drawn in January 2015 while $1.1 million was drawn in March 2015. 


PEL 96 Commercial Feasibility (Source: Company Reports)

Orica Prepayment

Quite recently, Orica agreed for the first pre-payment under the 250PJ Gas sales agreement terms made in 2013. Orica will make a pre-payment of $7.5 million.

Strike Energy has approved options to Orica during last year. As per the agreement, Orica will be able to subscribe to new shares in STX worth of $2.5 million. Strike can offer a maximum of 20.8 million shares to Orica. Meanwhile, Orica chose not to exercise the option to acquire additional shares in STX. Based on the terms with Strike, Orica’s entire pre-payment amount will be a maximum of $52.5 million.

 


Strike Energy Daily Chart (Source - Thomson Reuters)

Strike energy is putting all the efforts to remove hurdles to reach its target of starting commercial production in 2017-2018. There is no risk of funding to the SGCBP project in the near term as Orica’s prepayment amount as well as R&D tax refund will be used to fund the next phase of the project. Moreover, we believe that encouraging Le chiffre and Klebb project results will continue to deliver support to the stock of STX, going forward. Moreover, an official from Orica commented that Strike is offering competitive gas prices as compared to the major gas suppliers in eastern Australia, increasing the demand for the stock. 

Based on the foregoing we give a “BUY” recommendation to STX at the current price of  $0.135.

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