Poynton backs Strike after drill misses

Strike Energy chair John Poynton says the future is bright despite disappointing results from recent test wells at the South Erregulla project.

The Perth Basin gas producer surprised the market in recent weeks when wells two and three at South Erregulla did not flow as expected.

Well two flowed with gas and water at rates too small to measure, while well three did not flow at all.

The results led to a share price sell off for Strike, admitted to the S&P/ASX 200 Index at the start of February.

The company’s market capitalisation has halved over the month, from $1.23 billion to $600 million in early trade this morning.

Addressing shareholders with the release of the company’s half-year financials, Mr Poynton acknowledged the well disappointment at South Erregulla’s second and third wells.

“Strike’s South Erregulla drilling program followed the same processes that resulted in Strike’s string of major discoveries across the Perth Basin,” he said.

“Indeed, South Erregulla One is a commercial discovery well which flowed on test at eighty [million standard cubic feet per day].

“Given our previous successful campaigns and the specific result from SE1, the outcomes from SE2 and SE3 have been a setback for everyone and are causing deep reflection, including how to avoid a repeat.”

Mr Poynton said the company was assessing alternate development pathways for South Erregulla, subject to a revision of its reserves.

He expressed disappointment at the market’s treatment of the news, and said the board felt the company was currently undervalued.

“We have no control over the actions of market participants, but we are disappointed that the sell-off in the company’s securities has been so severe,” Mr Poynton said.

Pending a final investment decision, Strike has gas sales agreements with South32 and AGL at South Erregulla, a project which, under current state policy settings, is required to supply into the domestic market.

The well disappointment marred an otherwise strong half for Strike, where it finalised its acquisition of joint venture partner Talon Energy and brought its Walyering discovery into production.

Walyering was delivered at a cost of $30 million, with $16.5 million net to Strike.

Strike generated net revenue of $8.1 million over the half, delivering around 25 terajoules per day of natural gas into the Parmelia gas pipeline.

Walyering’s plant has a nameplate capacity of 33TJ per day and is exploring an expansion to 40-50TJ per day.

It is also further appraising the field through the Walyering 7 well, which is expected to spud next quarter and deliver an increase to reserves at the project.

Strike also highlighted increasing gas prices in the domestic gas market it feeds.

The gas spot price increased to a $11.59 per gigajoule high during the half – their highest point since 2010 – while averaging more than $9 per gigajoule.

Strike managing director Stuart Nicholls told an investor call that the future for gas demand in WA was bright, and flagged that the company could benefit from a mooted change to allow LNG exports from onshore gas basins in the state. 

Strike aims to bring $1.5 million out of its costs by the end of the financial year, comprising $250,000 worth of cost reduction on a corporate level, a $462,000 reduction on pre-final investment decision development costs, and $754,000 reduction on production costs at Walyering.

Production costs have averaged around 51 cents per gigajoule at Walyering to date.

Strike shares were up around 3.5 per cent at 8.45am AWST this morning.