Strike Energy Limited (STX.AX) Earnings Call Transcript

A particularly warm welcome to Strike shareholders. I'm very proud and honored to address you for the first time today as Chair of your company. Firstly, this morning, I'd like to introduce Shelley Robertson, our new MD and CEO. Shelley has more than 30 years of experience in a career spanning oil and gas, mining, energy, infrastructure and renewables. Her most recent role before joining us was as Chief Operating Officer at Fortescue Metals. And prior to that, she was Executive General Manager, Energy at Mineral Resources. So she has deep experience in the Perth Basin as well as in energy generally. Shelley joins us at a critical and exciting time for the company with a background of successfully having developed gas assets in the Perth Basin previously. She has made a massive impact on Strike already. And in the couple of months that she's been there, she's been able to achieve a huge amount, and I believe the company is in great hands as we transition to the next stage for the company. I'll turn to Shelley in a moment to take us through the company update. Before I turn over to Shelley, the announcement yesterday on West Erregulla signifies a major milestone for Strike and a turning point to realize the value from our largest asset. It has been a culmination of a huge effort by everyone in the Strike team. And while we still have some further work to do to finalize the documentation, I am very pleased with the results that's been achieved. Through the deal negotiated with Hancock Energy and the revised Macquarie loan terms, we will bring West Erregulla to market without needing to raise additional funds for this project. With Walyering increasing production, South Erregulla Power Plant coming online in a perhaps the best market conditions that we could expect for the peaker and with West Erregulla producing in 2029, Strike is positioning to not only have 3 cash producing assets but also the significant portfolio for exploration that we have with the Ocean Hill tenements and the Kadathinni tenements. So with that, ladies and gentlemen, I'll pass over to Shelley and then we'll -- at the end of Shelley's presentation, we'll have time for -- to answer some questions. Thank you, Shelley, and welcome.

Thanks, Nev. Hello, everyone. I'm delighted to be here today as the CEO and MD of Strike. It's certainly been a very -- I've had a great start here at Strike and it's certainly been -- coming into Strike sort of the idea of this role was very appealing to me due to my background in the Perth Basin, as Nev mentioned, and my understanding of the assets and just also understanding what the opportunity is here at Strike. So I'm very keen to continue to have my sleeves rolled up and sort of get things done. So without further ado, we'll get into the presentation and start talking about the West Erregulla announcement yesterday. So several months ago, when I stepped in, I sort of made a connection with Hancock, and we started to work quite closely on our agreements and where we were. And certainly, the team has done a huge amount of work in getting to the point where we are today. Today, we have really strong alignment with Hancock within the joint venture, which is fantastic, which -- it just bodes well for having alignment and being able to work together as we work towards our full formed documents. So we have -- in the agreements we have with Hancock, we have binding heads of agreement, which is we called -- referred to as the implementation agreement. And within that, we have a fixed and agreed and binding capacity charge, which is the amount we get charged to put the gas through the facility. On top of that, we also announced some funding that we have. So Hancock have given us access to a loan to fund our pre-FID component of the program. So I'll talk a little bit more about that in detail. The part about that, that's important is that it's not repayable until first gas. So it helps us to remain funded as we get through to full FID and first gas. We also have the $30 million Macquarie facility which is great and so Macquarie, this is an existing tranche we had that we were able to work with Macquarie to have access to that so that, that was previously going to be -- the CP was around FID. But because we've made such great sort of inroads with Hancock, and we have the binding heads of agreement, we were able to access that funding. So it just helps us to remain funded across this sort of time for Strike. The other thing, of course, is that with the WA gas market, you may be aware that -- there's a supply shortage coming '29, 2030 in WA, and so it perfectly positions us to put our West Erregulla gas into the market at a strong pricing point. So here is a little slide of summarizing West Erregulla. So many of you will be familiar with these stats that we have 251 petajoules of gas for sales over the project life. So the term of the agreement with West -- with Hancock over West Erregulla is for 12 years, but that can be extended depending on availability of gas. And we certainly have still remaining upside in across L25 and L26. And they are the 2 production licenses that cover West Erregulla and also Erregulla Deep, which sort of hasn't been factored in here. And of course, we are funded with pre-FID. So the pre-FID activities include drilling West Erregulla-6 and the Strike team have currently been on site for the last week or so installing the conductor on the West Erregulla well. So we're certainly -- there are certain activities that we're taking forward at the moment under our pre-FID work program. The other parts are going to be the drilling of West Erregulla-6 and workovers on 3 other wells. So our pre-FID activities are West Erregulla-6 drilling and 3 workovers and testing of 3 other wells. And so there's some activities that will be undertaken now, and then we'll be actually getting into the long-form documents with Hancock on the gas pricing agreement, processing agreement, the coordination agreement and the gas lifting agreement. And the reason we're going to work through those documents and get them executed prior to the more material pre-FID activities is so that we have security of our gas getting to market through Belisama before we start spending money on pre-FID activities. So it's a very structured and sensible approach for us to work with Hancock to get the documents in place for reaching that we need to actually reach FID. And at that point, we will then start working on putting money into the ground up for West Erregulla-6 in particular. We have good access to rigs and everything is sort of waiting. So our plan is to get the GPSA done and the other documents done by the -- around the end of this year, although we have a backstop date further in '27, and then we'll start to look at those pre-FID activities. So this is a slide just talking about the WA gas market. And you can see that from the demand is the yellow line there, the supply, existing supply and committed supply and West Erregulla, sits in the light blue section here of the AEMO chart. But you can see there's a significant shortfall coming in. So that's where we see ourselves coming online in early to mid 2029 with our West Erregulla gas and being able to optimize our returns on our gas marketing strategy. So this is just a little slide to talk about the, I guess, the leadership changes. And so I came in as CEO and MD on the 1st of June. And we also had the refreshed Board with Nev now being the Chair of the Board. So we now have 4 directors on the Board. We have Nev, we have Jill Hoffmann, Stephen Bizzell and Will Barker and myself. And I suppose that the Board is working really well, a smaller board suits the size and scale of the company really well, and we've certainly been able to get on with things as a team really well. And so the other thing, of course, that we will talk about today is about the other projects that we have. So we have, on top of West Erregulla, we also have the Walyering production ongoing at the Walyering facility, and we have the South Erregulla Power Station which is in the commissioning phase now, and I'll talk a little bit more about that as well. But when you think about us going forward as a business over the next several years, we're going to have those 3 streams of revenue, we're going to have the Walyering gas production, we're going to have South Erregulla capacity credits, which are not insignificant, and revenue from electricity sales, and we're also going to have West Erregulla coming online. So that's a step change for this company in having those multiple revenue streams, which will help to fund us going forward and into the future. So it's a very exciting and transitional time for Strike. We just have to be very structured and disciplined in putting the blocks in place to get all of that to be foundationally correct before we move forward. So that's -- that disciplined approach is something that I will deliver for shareholders in making sure that we bring things on time, in line with expectations and managed effectively. So if we talk about Walyering. Walyering is a great little plant that was built in 2023. We continue to produce gas from that facility. And we have just recently successfully installed compression at the site, and so that will help us to increase production. We have the ongoing contract with Santos, and we're able to deliver. What we're targeting is 20-plus TJs a day as we bring compression online. And we also have, of course, we recently announced the Walyering West discovery, which we're just going through a FEED process at the moment. But assuming that all goes well, we'll be looking to bring that online, which will bring us additional production, which does not require compression at that stage. So it will give us a chance to bring on a bit more gas. So we're looking forward to bringing Way West online as the field continues to naturally decline. The other thing that's worth noting about Walyering is that this plant is actually designed to be able to be moved. And so what I see is there's potential opportunity with some of our other tenements having discoveries and being able to, in the future, when we finished production at Walyering to be able to use this plant elsewhere. So it's just an important thing to note. The South Erregulla peaking plant. So certainly, this was -- has been an incredible project delivered by the team. It's not something that Strike has done before, but it's been an exceptional job to date. I've been up to the facility, and it's just a fantastic facility. I mean I've managed a number of power stations in my past with the likes of Mineral Resources, but this is certainly a very good plant that's been built really well. And you can see in the background of that photo, the top where the wellhead is and so you've got the well there, so close to the power station, which means that the input of energy, the gas going into the power station, the cost is very low. So it allows us to come into the market, electricity market at different pricing points and still to be able to create good returns for Strike. So where we are with Western Power at the moment is. They took, I guess, took sort of control of the power station on the 21st of July, and we are in their commissioning process at the moment. There are 2 parallel work streams for South Erregulla. There is the commissioning -- the physical commissioning piece, which is around the plant and also the switchyards. And then additional to that, is the dynamic modeling piece, which is where -- we actually sort of simulate bringing the power station onto the SWIS. And so the Western Power will bring a model of our power station that we provide to the SWIS network and run it under different scenarios and testing. And then there's an iterative process where we gradually get a power station sort of to be able to run without exception on the network. And certainly, today, we have -- we brought the power station physically online against the load bank to actually test all the compressors everything. So everything is running really well. The engines are running well. And so it's just that physical commissioning, I think, is fairly straightforward, and we're looking to get that done fairly proficiently. And then it's just a dynamic modeling piece. And so working with both Western Power and AEMO, and we've -- I recently set up a steering committee to actually really try and drive that process. So at the moment, we're thinking there's likely to be a bit of a delay. So we wanted to let shareholders know as soon as we could that there's likely to be a delay on delivery of that project, but it certainly doesn't indicate that there's any issue with the power station. It's just the process that we have to work through with Western Power and AEMO. And this is actually the first reciprocating engine power station that's been introduced to the SWIS. So that's a new thing. And it's certainly -- it's a very positive thing because Western Power see the advantages in having that flex of a peaking power -- peaking gas-fired power station on the network. But once again, it is new. So it just takes a little -- it's taking a little bit longer to get that properly embedded into the SWIS. So we've got 85 megawatts up there of integrated peaking power. It's our low-cost gas that's actually running the power station. We're in the final phase of commissioning, and we certainly have an outlook for strong electricity pricing as we go forward. The capacity credits, we know how much we're going to be earning in credit 2 years in advance. So we already know what we'll be achieving next year, the year after and then there's a forecast for the following year, and they are continuing to increase each year. So that certainly underpins the investment for us and makes a very strong case to the power station. So at the moment, we're still working around what it's going to like a revenue model for us on the other side with the power station. But we -- the next slide we'll go into a little bit more detail on that. But there's certainly that increasing support for supporting renewable generation on the SWIS and a peaking gas-fired power station is the perfect sort of balance with bringing on wind and so on. So if we talk about the market, there's a couple of slides here. The top one is just the reference trading price and example today. So you can see that the price fluctuates during the day. And so what Strike will be endeavoring to do. The peaking part of our power station is actually to be capturing those peaks of high demand and high revenue here and perhaps that's when the wind is not blowing, for example. So the wind farms are not coming on and we're sort of sitting in that sweet spot there. But we can determine ourselves how many hours a day we want to run the power station depending on pricing and so on. So it keeps us very flexible and we flick in and out on 15 minutes -- with 15 minutes sort of segments on the market. So it's a very sort of reactive and live market that we're working in, and we have the systems in place to actually manage all of that. And we have a very strong team in house that are very adept at managing the marketing side of all of this. So I'm very pleased with that. And the prices are impacted by the fact that coal is exiting the market, we've got increasing load from potential customers and just that increasing need of that flex that SEPP provides is really important. So I think we're in a very good place with SEPP. We'll know more once we get online and we get up and running and we can sort of see how we come in and out of the market, we'll have a much better understanding of what the revenue generation looks like we're certainly very happy with where we're sitting at the moment, what we see going forward. This is just a slide just to talk a little bit about the optionality we have around the power station. So actually, one of the questions on the -- online, which I'll get to you later, was around whether we can use West Erregulla gas at South Erregulla and yes, we do have the optionality of that within the contract, the agreement with Hancock. So that is certainly a possibility, because you can see how close West Erregulla is to South Erregulla. And what you can see on this slide is the yellow line is just the outline of our land that we hold up there. And that actually has the potential for over 300 megawatts of wind and so if you can think about it -- and we have -- that's -- you see the 132 kV line that we've actually tied into. So what this says is the Midwest is a fantastic area for both wind and solar, as you can imagine. And with the gas peaking power stations sitting in there to sort of pick up the gaps and also with batteries on the system, you can see how this is a really good opportunity for potentially someone to come in and have a look at this land for different opportunities, such as data centers or others. And so we certainly are open for business on what we might be able to achieve with this parcel of land that we have, particularly with the high generation of wind that we can see. We've been actually modeling the wind for several years now so that we have a really good store of data on what that particular parcel of land can deliver. So this is just a little bit of a summary of where we are today as a business. So as I said, we have Walyering online, delivering and back to 20 TJs a day over the next week or so. So that's excellent for us at Walyering. And with way West coming online, there's the additional optionality of that well being able to come online and backstop as the rest of the field declines, which is fantastic. With South Erregulla, we have the capacity revenue. So for year 1, it's around $19 million or $20 million. And for year 2, it's in the late 2030s. So that $52 million represents what the first 2 years of revenue will look like for us from capacity. And once we come online with South Erregulla, there's no penalty for us coming on late but as soon as we come online, the capacity credits start getting paid weekly. And so we'll receive that weekly capacity credit just for being available even if we don't put electricity into the market in a particular week, we still receive the capacity credit. So it really underpins that power station for us and the reason that we built it really. So we have that solid foundation of capacity credits. And on top of that, the electricity sales which are sort of -- and we're sort of looking at an average peaking price last year of $120 a megawatt hour. And as you saw in those charts that is -- that trend is increasing. West Erregulla, it's our biggest project. We just need to bring it online. So like I said, we're working very methodically with Hancock to get all the agreements done. We'll be letting you all know as soon as that happens, and that will lock in commencement of our firm pre-FID activities to get us forward to that point in FID, which will be exciting. So pre-FID I've talked about, which is West Erregulla-6 and the well workovers. Post-FID and pre-first gas, we'll drill -- as a joint venture, we'll drill one more well and that will get us to first gas. Now an important point is that Strike will remain operator until we reach FID. And as part of that process with Hancock, we'll also be locking in work program and budget for the coming years in the field development plan. So that gives us the -- and even though we're handing over operatorship to Hancock. We retained 50% of that field. And of course, under the JOA, the joint operating agreement, we have equal rights to Hancock on all matters. And so we're not giving that away. We retain that strength within the joint venture and also the additional controls to be able to work with Hancock to develop a field development plan and work program and budget that's fit for purpose for us as well as for Hancock. So that's a very important distinction on that project. And then we talk -- well, I guess we move on to the additional upside that we have. So you all know we have Ocean Hill and Kadathinni. So for the past however many years, we've been focused on our capital has been going out on SEPP and other things. But -- so we haven't really been doing as much exploration and drilling as we would like as a business. And so going forward, once we start generating revenue from South Erregulla, we have the additional revenue from Walyering and we have more certainty around West Erregulla, Certainly, that shores us up for how we're going to go forward with our exploration program. And we have some seismic planned and in budget for South Erregulla up at the power station for the future well required up there. And we also have seismic for Kadathinni. So Kadathinni is the next for me, an exciting opportunity because it's a Permian similar to Lockyer, and West Erregulla, there's huge opportunity there. So we're going to be planning that very carefully to be sure that we explore that in the right way to get the outcomes that we're looking for. And then, of course, Ocean Hill is a fairly well-known entity. And so Ocean Hill is also a bit cheaper wells. And so the dry hole cost for Ocean Hill is less than half what it is at Kadathinni. And so certainly, we'll be looking ahead. We have -- we're working on the approvals for the Ocean Hill well and also on the rest of the approvals and land access agreements and so on for the seismic, which is all going very well. So I think as we go forward, what we need to get back to as a company is creating value by the drill bit. And I know a lot of people came into Strike with that exploration sort of that was the excitement about Strike, and we have been incredibly successful in drilling great targets within the company in the past, and we'll look to move forward again. And of course, with our acreage, we own 100% of all of our acreage apart from the West Erregulla joint venture, and so that gives us also enormous flexibility about how we manage the financing of the future exploration program because there's a lot of interest in these projects from other parties as well. So if we decide we want to go down the joint venture path or whether we want to fully fund them ourselves, that will sort of -- that will come as we move forward and understand the project process better and understand those projects better. And this is just a little bit more deep diving, a little bit more detail on those projects. So Ocean Hill, L26 is the near-field upside for West Erregulla, so that's Erregulla Deep and sort of that L26 production license, which is to the east of the main West Erregulla project. And then Kadathinni, like I said, that's the Permian play. There's a lot of interest in this, in particular in Kadathinni, and it's just fantastic that we have 100% of Ocean Hill and Kadathinni as well as our other tenure as well because 3,000 square kilometers in the Perth Basin is a pretty enviable position to have as an operator, particularly with 100% ownership. So why Strike? Why now? I think we're on the pathway. Like I said, a structured approach will get us across the line with all of this. We're going to be disciplined with our cash management, with how we roll out projects. We're going to be doing what we say we'll do. It's very important to me that we actually deliver what we say we will deliver. So West Erregulla unlocked, which is a fantastic start. Yes, we still need to get to full form documents, but we have a very aligned joint venture partner on that. They obviously want to get West Erregulla across the line because it supports development up the Belisama facility. We then have our multiple revenue streams coming online over time, which is Walyering, South Erregulla and West Erregulla. We have that diversified exposure, which is fantastic. So we have the gas sales, but we also have electricity scale -- sales. And so that's really important. So the distinction from others in the basin that we're very unique that way. We have our funding secured for the time being. So certainly, that's -- we are funded through for the next good while. We have West Erregulla well covered with the multiple opportunity, we have strong support from our bank Macquarie, with additional facilities available there as and if required, and we have the support from Hancock on West Erregulla, pre-FID on very favorable terms. And so we're well covered for all of that. That gives us the opportunity to sort of get out there and really think about what comes next. But for us, it's key is delivering South Erregulla, so that's an absolute focus of mine right now. We have the -- getting those West Erregulla documents completed, absolute focus of mine right now, and we have the right teams in place to deliver those work streams. Certainly, the teams have done an outstanding job, and they'll continue to do so. And then we start looking to our growth opportunities as a business. And like I said, value from the drill bit, I did it and saw it at Lockyer. Norwest going from a $12 million market cap to a $500 million market cap based on the back of the Lockyer discovery. I mean, we want to find one of those, right? So that's what we're going to be trying to do. So at the moment, I think we see ourselves as undervalued. We have a lot of work to do, but we have the right team in place to deliver really strong outcomes. And I just want to say that I value all of your support as we move forward into this next phase for Strike Energy. So thank you. Nev, are there any comments you'd like to add? I didn't give you much of a chance to speak. I was on a bit of a roll.

No, no, that's great, Shelley. Well done. I think the other point that I'd make is that in making the decision on the pathway to market for West Erregulla, we did look at all options and all alternatives. And we negotiated the different deals there to a point where we can make a decision of which was the best -- in the best interest for Strike, the best interest financially, time-wise, alignment-wise. We've got a tremendous working relationship with Hancock Energy, and we're working very constructively with them. And I think Shelley has been a key part of that building that relationship and rebuilding that relationship. And so I know there's been some concern about the way we might partner with that and the handover of operatorship. But I'm very comfortable that we've got great alignment. We've got a joint venture partner that's very motivated to bring West Erregulla to market. And I'm very comfortable with the transfer of operatorship at FID so that we get that efficiency and alignment right through the production chain.

Thanks, Nev. So what I'll do now is I'll just -- I'll start going through some of the questions that were asked on InvestorHub. Just bear with me while I pull them up. So the first question I'll answer is around West Erregulla economics evaluation. The question is today's announcement materially derisks West Erregulla, but what information can you provide to help shareholders and analysts quantify the value of the project. So what I'll say first is that the capacity charge that was negotiated with Hancock is confidential and will remain so. However, there's enough public data for a back-of-the-envelope toll range and the analysts will be working through that. Certainly, they'll be thinking about the facility CapEx, the capacity structure, and the infrastructure return and term. So that will all come through the market through analysts and so on over time, but there's certainly enough information out there for that to be worked through. West Erregulla operatorship is the second question, why is Strike transitioning operatorship at West Erregulla to Hancock and has Strike...

Sorry, Shelley, can I -- sorry to interrupt. Just on the West Erregulla. I think to Shelley's point, if you back calculate from the $850 million, we've got a share of that plan with our effectively 15 PJs a year through that plant. You can back calculate that, add a couple of bucks on to that for operating, lifting costs and OpEx and decommissioning costs and export pipelines and all those sorts of things. And the gas price right at the moment is probably in the $8.50 range in the market. We're expecting that to go higher in the future, but somewhere around about that now. So if you take our 15 PJs per annum at that sort of margin, this project will be somewhere in the sort of $60 million to $80 million worth of cash generation per year is the sort of rough ballpark of where it will be. You can apply whatever multiple you think is appropriate for that and get a value. But our view is the value of West Erregulla is going to continue to increase. We haven't had to commit any gas on a presales agreement. So we have all of the gas available to market and we're in the position where we've funded the project without needing to presell that gas, which puts us in a very strong position. Sorry, Shelley.