Written by:
1/19/2011 10:07 PM 

Strike Energy (STX-ASX) announced early this week, the sale of a number of their onshore gas producing assets in the USA for $21.7 USD. This strategic move comes as little surprise to those who paid particular attention to the company's AGM presentation, at which the management team hinted at a change in the company's strategy. Managing director, Simon Ashton, believes the sale now gives Strike Energy a 'war chest' of cash to explore it's high impact US and Australian targets and is a clear indication that STX's management prefer to unlock value than dilute share holders holdings with capital raising into low share prices.

According to Strike's public announcement, the sale of their Rayburn and Mesquite interests has netted the company $21.7m USD and equates to $2.63 USD per Mcfe of 1P reserves. The cash will be used to pay down existing debt ($5.8m USD) and close the remaining open hedging positions. The net result will leave STX with cash of just over $20m on the balance sheet, and exposure to their remaining interests, the recent Louise discovery, Steindorf (to be tested early February) and the suspended Muegge well. Additional to the existing and developing US assets, Strike Energy have large prospective CSG acreage in the Southern Cooper Basin and the FutureGas project, as well as their offshore Baniyas project in the north of WA. At a market capitalisation of around $60m at current share prices, it would appear STX offers investors large potential upside with limited downside risk.

The sale of the Rayburn and Mesquite interests doesn't appear to be staggering from a financial point of view, with the company achieving fair results for their 1P reserves. However, the wells were both showing signs of decline and given the JV's success rate and recent finds/potential finds (Louise is producing, Muegge is suspended and Steindorf is awaiting fraccing and testing), it appears management have made a decision to realise the value from Rayburn and Mesquite in order to fund the development of what management and shareholders alike are hoping to be significant producing assets. Steindorf alone is targeting a potential 200 bcf of gas and any success here should add significantly to share holder value.

The management team have stated that a proposed 6 well exploration and development could start in February 2011. Should the JV continue to achieve high levels of success (the JV has so far achieved a success rate of around 50% from wells drilled) with what they believe are low risk, high return targets, share holders should be rewarded with strong compounding returns on their equity. This change in direction is bound to be seen as a positive by many of STX's share holders who have endured what was without doubt a frustrating 2010.

Apart from the reinvestment and potential compounding returns that management are chasing, the sale of assets has also reduced the potential for Strike's shareholders being asked to front more cash for the company's future developments. Given the company's relatively lacklustre share price performance and ongoing delays in the Cooper Basin, I'm sure I wouldn't have been the only share holder a little bit frustrated should a capital raising had arisen. The management team's reluctance to dilute shareholders at such low share prices should be applauded.

Unfortunately weather and apparent equipment failure (more details from the company around the equipment failure would be nice, but we'll leave that topic alone) has resulting in even more delays in the Cooper Basin since my last coverage. Problems at the Forge well have left investors with barely half a picture of the project's potential, with the main zone of interest not reached. Management believe results from other zones are encouraging, but it's hard to see any value being unlocked from this potential company making asset until drilling resumes and results clarify the potential of the asset. Continued success and sustained cash flow from the US assets may help the funding side of things, but seemingly endless periods of bad weather and a high demand on drilling equipment may result in even further delays. Patience is certainly going to be required in order to realise any value from STX's vast CSG acreage (the acreage covers some 2% of South Australia's entire land mass).

On the Australian offshore front, no updates have been forthcoming regarding the status of Strike's negotiations around the Baniyas acreage. With other big name players active in the region, a farmout is a strong possibility and is the most likely scenario in my opinion.  Finalising the acreage and securing a farm in partner could offer some significant upside in my opinion and any news could prove a catalyst for share price appreciation.

All in all there is no doubt that 2010 was a frustrating year for investors in Strike Energy. However, if the tone of the company's AGM and their recent strategic sale of assets is anything to go by, it would appear the management team are highly driven to make 2011 a year of high impact activity and hopefully company changing results. STX remains one of my preferred speculative energy plays and is a company I will continue to watch very closely.

Disclaimer: I am a shareholder of Strike Energy shares. This article should not be considered financial advice and no investment decision should be made on the basis of its content. As always, advice from a professional investment advisor should be sought before making any investment decision.

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Tags: oil , gas , assets , energy , CSG , investment

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