Natural gas is not for every investor but as a money maker it can be hard to beat, especially in a hothouse market created by strong demand, limited supply, potential takeover action, the promise of discovery — and the unexpected interest of iron ore billionaire Andrew Forrest.
The place where most of those factors intersect is Western Australia, a state which once had a gas surplus but now faces a shortage like the rest of Australia thanks to government discouragement of exploration and project development.
Strike Energy (ASX: STX), which featured in a stock market rush last year, and a Small Caps story earlier this year ‘Strike Energy might be the next target in WA’s billionaire gas game‘ is once again in the cross hairs.
Warrego Energy, the previous prime target in WA’s gas dash, has been delisted after falling to another iron ore billionaire, Gina Rinehart, who beat off competition from media mogul Kerry Stokes and lithium leader, Chris Ellison.
Strike, which tried to compete in the bidding, left the game with a handy second prize of $116 million, but now finds itself as a desirable morsel for bigger players as west coast gas prices rise and demand soars from traditional customers and new potential buyers keen to process WA’s critical minerals.
Gas prices on the rise
For newcomers to the WA energy sector, which is completely isolated from Australia’s east coast energy market, there’s a lot to absorb with the starting point being that the state’s gas star, the North West Shelf, has become a fading star and other sources of supply are drying up, or suffering from outages.
That means a State which once had the cheapest gas in Australia is on the price-rise escalator.
Credit Suisse, an investment bank, told clients last week that WA gas, which was selling for as little as $2 a gigajoule three years and $4/GL last year is heading up to $9GJ (and perhaps $10/GJ) almost double recent consensus forecasts of between $5/GJ and $7/GJ.
A supply squeeze is one side of the WA gas sector. Strong demand from traditional customers and new mineral processing projects which are being actively encouraged by all levels of government, forms the other side of the price pincer.
Forrest’s change of heart on gas
The irony of government limiting supply and encouraging consumption is more than delicious, it means that Strike and other players in the west coast gas business are certain winners.
Forrest, a man who has campaigned long and loudly against all forms of fossil fuels, is not yet a player in the WA gas game.
His discovery that gas really is an essential fuel came with the realisation that the renewable energy being produced on his wind and solar farms can be erratic which means he has to build gas-fired “firming” (back-up) power stations with the first earmarked for the western New South Wales city of Dubbo.
A series of other recent events have highlighted the importance of gas in the future of Australian resources, starting with pointed comments last week from a former Premier of WA, Colin Barnett, at a Perth resources conference.
Barnett said the Australian Government needed to rethink its energy policy because downstream processing of critical and energy minerals such as rare earths and lithium for batteries was “heavily reliant on gas”.
Write-downs of known gas reserves has contributed to industry concern about future supplies as has the entry of a major new customer in the form of the Perdaman urea (fertiliser) plant which has soaked up most spare capacity.
Layered over the top of the gas sector is a threatened shortfall of electricity supplies in WA thanks to the collapse of the State’s coal mining industry which has led to the importing of coal from NSW.
It was this cocktail of price drivers which sparked the bidding war for Warrego, which was a half-owner of the West Erregulla gas field with Strike which now has Rinehart as its partner, and potential buyer given her obvious interest in growing a big oil and gas business.
Strike, which features a heavyweight board led by Perth banker John Poynton and former Fortescue Metals chief executive, Neville Power, promotes its business case by pointing out the size of its tenement position in the Perth Basin, strong funding and near-term “high impact” exploration drilling.
Credit Suisse and Macquarie Bank see upside
Credit Suisse, which will soon be absorbed by UBS, has Strike on its buy list because of its role in leading “a WA gas renaissance”, with a share price target of 55c, up 10c (22%) on last sales at 45c.
“Strike is the primary WA pure gas play exposure left following the recent Perth Basin consolidation, which Strike finessed well,” the bank said.
“We expect enhanced investor interest as Strike emerges as the 4th largest listed energy exposure in Australia with first cash flow imminent from Walyering (a gasfield), amidst a line up of possible catalysts including rising WA gas prices, M&A and exploration.”
Macquarie Bank echoes the points made by Credit Suisse and the share price target of 55c but can see much more happening should the current wave of drilling make a major discovery.
“We see 15% upside in Strike Energy shares in our base case, however much more (greater than 150%) in a bull case scenario of high reserves outcomes and high prices.”
“We see corporate appeal given the tightening WA gas market and arrival of miners (Rinehart and Ellison) in Perth Basin gas M&A,” Macquarie said.