Company Overview- Strike Energy Limited is an Australia-based company engaged in the evaluation, development and production of oil and gas and energy projects in Australia and the United States of America (USA). 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. 

Analysis– The startup of the three Gladstone LNG facilities from late 2014 is causing both supply and pricing challenges for current East Coast gas consumers. There have been reports of manufacturers unable to renew or secure gas contracts in the face of rising gas prices as the market braces itself for a trebling of East Coast gas demand over the coming 3 years. Strike’s permits PEL 94, 95 and 96 are ideally located on the southern flank of the Cooper Basin with direct access to infrastructure connecting it to Eastern Australian gas markets.



East Coast Gas Demand (Source - Company Reports)


Strike’s geographical positioning, gas saturated and water dry relatively shallow coals (2,000m deep) and a controlling stake of 66.7% in PEL 96 has seen Strike move fast to secure innovative offtake agreements with domestic foundation gas customers (Orica, 250PJ), Orora (30PJ) and Austral Bricks (12.5PJ). These contracts and associated performance based pre payments are supporting a rapid commercialization. Strike’s project is unique in that it offers domestic customers gas which is not reliant on Santos or the Moomba gas plant and thus is not competing head to head with higher priced gas from Gladstone. To secure this gas stream for their domgas needs the offtakers agreed to support the development by injecting capital as varying operational milestones are reached.


Gas Price (Source - Company Reports)

Strike estimates PEL 94, 95 & 96 could contain a net prospective mean deep coal gas resource of 16.4Tcf with 4.5Tcf or 27% of that lying in PEL 96. Strike proposes a Phase 1 development that could eventually access up to 1.25Tcf of sales gas net to Strike. At this stage 22% of the Phase 1 resource has been contracted.  Any sales above the annual contract quantities could be sold into the high priced spot market.


New Supply Focus (Source - Company Reports)

Strike confirmed last month that they have commenced their Cooper Basin frac program of the deep coals last month. Le Chiffre-1 and Klebb-1 will be re entered and fracced in PEL-96 located on the southern margin of cooper basin. When complete the frac crew will move to block PEL-94 (STX 35%), where Davenport-1 will also be re entered and the coals fracced. STX also announced they will drill a 6 well pilot by year end which is one more than expected . In total STX aims to have 8 wells drilled by end 2014 in PEL-96 and producing in 2015 before potentially declaring Final Investment Decision (FID) by end 2015.


Southern Cooper Basin (Source - Thomson Reuters)


The fracs will take about 4 weeks to complete and probably a further few weeks to flow back th injected frac fluid before a meaningful flow of gas is recorded at surface. STX estimates the production trail could last 3 months. If two frac stages are run per well it is possible 0.3 – 0.5MMcf/d could flow to surface. However STX advises caution on initial results. STX is moving ahead at speed to develop its Southern Cooper Basin Gas Project and with the 6 well pilot complete aims to have all 8 wells on production by end 1Q15. STX will modify the program as it progresses to obtain optimal outcomes. Critical technical and financial data will be provided by the combined frac and flow testing, which will be essential to understanding how to develop the coals commercially.


Strike's Southern Cooper Basin Gas Project (Source - Company Reports)


With regards to PEL 96, Strike is operator and it’s 33.3% JV partner is Energy World Corporation (EWC). During 2012 strike drilled 2 wells within the Block. Le Chiffre-1 and Klebb-1 materially de risked key parameters underpinning project resource (estimate 1.25Tcf) and cost estimates ahead of the upcoming appraisal/pilot program, that if successful could lead to the Phase-1 commercialization of its south cooper basin project. The coals are fairly shallow at 2000m and the lean nature of the gas suggests PEL 96 is in the dry gas window for inertinite rich coals. The key risk ahead of the frac program is the stress regime and hence the fraccability of the coal. However indications from recent wells suggest the stress is normal.


Strike Daily Chart (Source - Thomson Reuters)

With regards Le Chiffre-1, the well was drilled to a total depth of 2,089m and premium casing was also used to secure re-entry in advance of the frac program.  Strike indicated that the Permain section  intercepted was 600m+ in Le Chiffre-1. The well intercepted 105m of coal and exceeded its pre drill estimates by 118% recording gas throughout the section. Strike reported that within the Patchawarra Formation 70m  of coal was intercepted net 46m. No indication of water or heavy gas was recorded within the coals. In effect the coals appear dry and the gas lean.

With regards to Klebb-1, the well is located 4km west of the Moomba to Adelaide gas pipeline and 8km to the west of Klebb and was drilled to a total depth of 2193m using premium casing which will enable re-entry during the upcoming appraisal. Over 145m of net Permain coal was encountered with gas recorded whilst drilling. Within the Patchawarra Formation 89m of net coal was intercepted whilst the main Patchawarra coal was reported to be 34m thick while two other coals were each 15m thick. In total Klebb exceeded its pre drill estimates for coal by 165%.

To date STX has secured conditional gas sales agreements (GSA) for 292.5PJ of Phase-1 project gas for sale to East Coast manufacturers. These GSA’s are conditional upon declaration of FID which does not require approval of EWC. These contracts are bilateral and details are confidential. However, Orica’s willingness to invest $52.5m to de risk the project, we believe has secured them a lower gas pricing. Orica, Orora and Austral Bricks have agreed collectively to pay $56m to STX of which we understand that $16m might be payable Pre – FID as certain milestones are reached. The market has yet to appreciate this is not biogenic CSG associated with substantial water but rather is thermogenic (cracked through heating) gas generated from deeper dry, porous and permeable coals. For STX technical risk has been reduced by drilling success at Le Chiffre, Klebb, Davenport & Marsden where thick coals contain gas and the frac program and pre payments from customers reduces both the financial and operational risk. We put a BUY on the stock at the current price of $0.14.

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