Strike Energy Announces Q4 /22 Quarterly Report

Source: 1/30/2023, Location: Not categorized

Comments from Managing Director & CEO Stuart Nicholls:
“The fourth quarter of calendar year 2022 was significant for Strike shareholders on a number of fronts. Firstly, and most importantly, the Company made substantial progress in its pursuit of becoming a gas producer by the end of Q1/23 at the Walyering gas field.

“Secondly, post engaging with the Warrego Energy Board on a proposed merger, significant corporate interest has precipitated for entry and access to Perth Basin gas, with Beach Energy, Mineral Resources and Hancock Energy emerging as bidders or acquirers of Warrego’s shares. This has culminated in a peak price paid of an equivalent $2.14 GJ on a 2P Reserve plus 2C Resource basis for Warrego*. This transaction metric results in a multibillion dollar look through for the value of Strike’s in ground gas.

“The corporate activity for both Warrego and Norwest Energy Limited is validation of the rising value and increasing scarcity of gas in Western Australia, as well as recognition of the quality of the assets and gas discoveries of the North Perth Basin.”

Highlights Warrego Offer
• Strike’s unconditional off-market takeover offer to acquire all the outstanding shares in Warrego Energy Limited (ASX: WGO) (Warrego) for 1 new Strike Share for each Warrego share is now open for acceptance by Warrego shareholders.

• The implied offer price is $0.37 per Warrego share based on Strike’s last closing price, which represents a 32% premium to the current offer by Hancock Energy (PB) Pty Ltd’s of $0.28 per Warrego share, and a 3% premium to Hancock’s proposed conditional offer of $0.36 per Warrego share (which is subject to a 40% minimum acceptance condition).

• Strike and its associates own ~21% of Warrego shares and Strike has received statements of intention to accept Strike’s offer, subject to no superior proposal, from Warrego shareholders holding a further ~11% of Warrego shares on the date that is 21 days after the opening of Strike's offer, being 31st of January 2023.

• The Production Licence for the Walyering gas field (L23) has been granted and the Walyering gas field development procurement program is 98% complete, fabrication is 65% complete and the project remains on schedule and on budget.
• The EP447 JV has entered into a binding gas supply agreement for 36.5 PJ of gas to SantosWA Limited with target commencement from Q1/23, for a period of 5 years.

Greater Erregulla
• Strike’s Board has undertaken a strategic review and has determined the optimal location for a domestic gas processing plant to service its Greater Erregulla portfolio of assets is on its 100% owned Mid West Low Carbon Manufacturing Precinct.
• Locating a domestic gas plant at the Mid West Low Carbon Manufacturing Precinct offers several benefits: faster and simpler environmental approvals; a centralised facility to process regional gas from across the Greater Erregulla region and avoid duplication of infrastructure; flexibility to scale up; and integration of direct renewables energy and consequent reduction in total produced CO2e emissions.
• The EP469 (West Erregulla) JV has agreed a 2-well near field drilling program to start in early 2024 that will test two structural extensions (Southwest Erregulla and Erregulla Deep) which adjoin existing proven Greater Erregulla Reserves or Resources.
• Tathra Fault Terrace identified with upthrown fault blocks hosting four large leads in the Arrino and Kadathinni structures with up to 100 km² of combined closure. The leads are similar depths to the Erregulla fields, and on trend with Lockyer Deep.

Project Haber: Mid-West 1.4mtpa Fertiliser Development
• Globally recognised ammonia/urea engineer, Technip Energies, has been awarded the Front-End Engineering for Strike’s Project Haber, a 1.4 mtpa low carbon urea fertiliser development to be located at the Mid West Low Carbon Manufacturing Precinct.
• Environmental referrals submitted to EPA as part of permit approval process.

WA Gas Market
• AEMO Gas Statement of Opportunities 2022 released indicating a current deficit in the WA gas market, which is predicted to significantly increase (to -213 TJ/d) as WA retires its coal fired power generation fleet and moves to renewable and gas alternatives.
• Several WA gas supply sources went down temporarily or permanently during the quarter, resulting in gas storage drawdown and gas rationing. This has highlighted the fragility of the WA gas market and lack of future supply sources.

• Strike agreed a $153 million domestic gas financing package with Macquarie Bank Limited which includes: refinancing of the existing $33 million of drawn and undrawn debt; $40 million of committed debt to support the planned South Erregulla appraisal activities; and an $80 million uncommitted facility for the proposed Erregulla domestic gas development.
• Macquarie Bank exercised 35 million options post quarter-end with proceeds of $10.2 million.
• Post the option exercise Strike had access to ~$67 million of available funding in cash and committed undrawn facilities2. Strike Strategy & Portfolio As reported at the end of the previous quarter, Strike is currently the largest owner of combined Perth Basin gas Reserves and Contingent Resources with net 982 PJ made up of 371 PJ 2P Reserves and 611 PJ of Contingent Resources.

3 These numbers do not include Strike’s ~11.5% indirect interest in West Erregulla as a result of its ~21% shareholding in Warrego Energy Limited.

Strike’s gas portfolio provides the platform for its vertically integrated gas, fertiliser and renewables strategy. Strike is building out an integrated business model that enables the consolidation of its approach to carbon along the product chain as a key value driver, ultimately generating value accretive outcomes rather than margin reducing costs.

This value -add strategy is enabled via utilising the inherent low -cost and high -quality nature of Strike’s gas resources, facilitating Strike to transfer, consume and abate its own carbon throughout the downstream manufacturing processes, whilst potentially integrating its own renewable energy throughout its activities, generating world class low carbon outcomes for both energy and fertiliser products.

Strike’s strategic aspiration to become one of Australia’s lowest cost and lowest carbon energy producers is set to be realised within its very first project at the Walyering gas field and will be cemented further via the Erregulla domestic gas development and ultimately Strike’s flagship 1.4mtpa low carbon fertiliser development, Project Haber.

Offer to acquire Warrego Energy
During the previous quarter Strike was engaged with Warrego’s Board in a proposed merger. Following competing offers for Warrego, on the 11th of January 2023 Strike opened an off-market takeover bid to acquire all of the ordinary shares issued in the capital of Warrego that it did not already own. Under Strike’s offer, Warrego shareholders who validly accept the offer will receive 1 new fully paid ordinary Strike share for each Warrego share held. This offer is unconditional, open and capable of acceptance by Warrego shareholders. Strike’s offer is scheduled to close at 7:00pm (Perth time) on 13th February 2023.

As at close of trading on the 27th of January 2023, being the last trading day prior to the date of this report, the consideration under Strike’s offer implied an offer price of A$0.37 per Warrego share4.

This represents a 32% premium to Hancock’s current offer of $0.28 per Warrego share and a 3% premium to Hancock’s proposed conditional offer of $0.36 per Warrego share (which remains subject to a 40% minimum acceptance condition).

As at today, the 30th of January 2023, Strike currently owns 21% of Warrego’s shares (based on 1,233,122,325 shares on issue) and has intentions statement from Warrego shareholders holding a further ~11% to accept Strike’s offer, subject to no superior proposal, 21 days post Strike’s offer opening, being 31st January 2023.

If Warrego shareholders have questions in relation to Strike’s offer or how to accept it, please call the Offer Information Line from within Australia on 1300 737 760 (toll-free) or from outside Australia on +61 2 9290 9600 (charges apply) between 8.15 am and 5.30 pm (AEDT time) Monday to Friday. Or please consult Strike’s website at:

Domestic Gas Business

Walyering (EP447, STX 55%)
During the quarter Strike materially progressed the Walyering gas field in EP447 towards production where Strike is the operator and owner of a 55% equity interest, with Talon Energy Limited (ASX: TPD) (Talon) the owner of the remaining 45%.

Post quarter end, the EP447 JV was granted Production Licence - L23 by the Western Australian Minister for Mines and Petroleum. The granting of the Production Licence was on the critical path and represents a key milestone in the timely development and subsequent start-up of production from the Walyering gas field.

As part of the broader $153m Macquarie Bank domestic gas financing package announced to ASX on 19th December 2022, the existing $33 million drawn and undrawn debt facility provided by Macquarie Bank (of which $10 million is dedicated to the Walyering development) will be refinanced into a new term facility at a 6% coupon plus bank bill swap rate and a 2.5-year tenor with a period of capitalising interest.

Strike and joint venture partner Talon announced during the quarter that it will supply a total of 36.5 PJ of gas to Santos

WA Limited on a firm basis with target commencement from Q1 2023, for a period of 5 years. The contract covers tranches of firm take or pay volumes as well as ’as available’, which provides flexibility to the Joint Venture as the field ramps up towards is maximum production.

The agreement is US-dollar denominated linked to escalation in US-CPI.

A total of 98% of the procurement program for the upstream facility is complete with 65% of fabrication having been completed. The upstream facility remains on budget and on schedule. The workover rig is expected to mobilise to site in mid-February to complete both the Walerying-5 and Walyering-6 wells.

The EP447 Joint Venture sanctioned the development of the up to 33 TJ/d and 250 bbl/d production facility at the Walyering gas field following the successful appraisal of the field via the Walyering 5 and 6 wells, which delineated a gross 54 PJ of 2P Reserves and gross 32 PJ of 2C Contingent Resources plus ~0.8mmboe of associated condensates5.

The gross cost of the production facility remains on target for approximately $14.4 million plus at least $2.4 million in costs for the connection and metering to the APA owned Parmelia Gas Pipeline. The overall fixed and variable operating cost of the field is estimated at approximately $0.19/GJ based on 33 TJ/d annual average production6. The facility, which will be the closest source of gas to the major Southwest gas market, will be powered purely by solar and battery storage thereby enabling Walyering to have an emissions intensity that is more than 10x less than most current domestic WA gas supplies.

Greater Erregulla (EP503: STX 100%, EP469: STX 50% and operator)
The acquisition of the ~3,500 hectare Mid West Low Carbon Manufacturing Precinct (the Precinct) together with the gas discovery at South Erregulla in early 2022 and the current corporate activity involving a potential change of control at Warrego, has caused Strike’s Board to carry out a review of its development strategy for its Greater Erregulla portfolio of assets. This review focussed on ensuring that Strike’s physical and financial resources are directed at where it can most efficiently and effectively develop its Greater Erregulla gas resources to generate additional early domestic gas revenues in a manner and within a timeframe that it can best control, whilst preserving sufficient gas as feedstock for the planned Project Haber 1.4mtpa urea facility.

As a result of this review, Strike’s Board has determined the optimal development strategy is to locate domestic gas processing infrastructure at the Precinct that is capable of servicing Strike’s portfolio of domestic gas development opportunities across the Greater Erregulla region. Locating a gas plant at the Precinct offers significant benefits which include:
• accelerated environmental approvals as the development does not require clearance of native vegetation / habitat and does not require the need to secure leases and offset areas;
• a centralised facility with capacity to process gas from across the Greater Erregulla region and avoid duplication of infrastructure;
• the ability to integrate the proposed Precinct renewables capacity to reduce CO2e emissions; and
• the flexibility to expand capacity and infrastructure efficiently as appraisal and nearfield exploration drilling occur in the area over the next two-years. There is abundant cleared land in order to integrate additional processing trains as further gas resources are delineated.

Strike will look to engage a third party to build, own and operate the gas infrastructure and will now commence the process of identifying that third party and commencing negotiations for the new project, which may include Australian Gas Infrastructure Group (AGIG).

Having selected the Precinct as the preferred location for Strike’s domestic gas processing infrastructure, Strike has determined not to extend the tri-partite arrangements between Strike, Warrego and AGIG for the previously proposed 87 TJ/day Phase 1 West Erregulla dedicated gas processing plant to be constructed on EP469 and will instead focus its attention on the gas processing development at the Precinct and then Project Haber.

This new gas plant is earmarked to be financed via an $80m facility from Macquarie Bank, which is currently uncommitted and subject to further bank approvals and project milestones. This finance facility would have a similar cost to the Walyering Facility with a 4-year tenor post project completion.8

Strike has also exercised its right to terminate the gas balancing agreement that was entered into between Strike and Warrego as part of the Phase 1 West Erregulla development to align the interests of both parties with respect to the difference in total contracted volumes for each of their respective foundation gas sales agreements.9 During the quarter, Strike in conjunction with Mineral Resources Limited subsidiary, Energy Resources Limited negotiated and post quarter end secured multiple firm and optional drilling slots on the Ensign 970 for its upcoming appraisal and exploration campaigns over 2023 and 2024.

The secured drilling slots will be broken up into two separate campaigns:
1. South Erregulla appraisal campaign - Two updip appraisal wells to start in mid-2023 in Strike’s 100% owned South Erregulla gas field in EP503 with the target of converting the current independently certified gross 178 PJ of 2C Contingent Resources in the Kingia Sandstone to 2P Reserves;

2. West Erregulla exploration campaign - A nearfield exploration campaign in early-2024 to drill and test Erregulla deep-1 and Southwest Erregulla-1 within EP469, where an exploration work program and budget has been formally approved by the EP469 Joint Venture that also includes 2D seismic reprocessing over the Erregulla Deep structure.

The drilling expenses at South Erregulla will be funded by a $40 million drilling facility to be provided as part of the $153 million Macquarie Bank domestic gas financing package announced to ASX on 19th December 2022. The drilling facility has a 24-month tenor, capitalising interest and a 11% coupon plus bank bill swap rate.

Tathra Terrace - Arrino & Kadathinni (EP503 and EP504: STX 100%)
During the quarter Strike’s regional seismic analysis identified the Tathra Terrace structural trend within the 100% Strike owned EP504 and EP503, which comprises a series of linked fault blocks formed between the Urella fault to the East and the Tathra/Wicherina Fault to the West, extending from Lockyer in the North.

At least four large structural closures are identified along the Tathra Terrace.

Three linked closures rise towards the North and are termed Arrino North, Arrino Central and Arrino South leads respectively. The deeper Kadathinni lead comprises an additional fault block somewhat isolated from Arrino and deeper to the South. South of Kadathinni, the Tathra trend shows structural reversal along a deep flexure marking the Abrolhos Transfer Zone.

The combined closure of these four structures is ~100km². Estimated depths of these structures range from approximately 4km for Arrino (roughly equivalent to Lockyer Deep) to around 6km for Kadathinni (deeper than at West Erregulla). As an approximate guide, the resource density of the Erregulla fields is 13.6 PJ per square kilometre of Permian (Kingia) closure.

Ocean Hill (EP495, STX 100%)
As part of the rig procurement process for the Greater Erregulla campaigns, Strike has secured a further option slot in 2024 which, subject to acquisition and interpretation of new seismic data, Strike intends to use to drill an appraisal well into the 100% owned Ocean Hill gas field within EP495. The appraisal drilling will target the conversion of the current independently certified 300 PJ of 2C Contingent Resources to 2P Reserves10 and bringing Ocean Hill online to generate additional tranches of low cost and fast to market gas by 2025 when the market is expected to be at its tightest.

Similar to Walyering, Ocean Hill is adjacent (6 km) to a pipeline compressor station. In this case, it is Compressor Station-8 of the Dampier to Bunbury Natural Gas Pipeline, which is connected to both the LNG projects in the North and the industrial gas markets of WA in the South, providing multiple potential commercialisation pathways. Ocean Hill is firming as a material and valuable low cost option for Strike’s gas business.

WA Gas Market
On top of the ongoing tightening of long-term supply and demand dynamics, very immediate events in the previous quarter have shown the fragility of WA’s gas market with recent unplanned shutdowns, asset integrity and field failures all contributing to supply disruptions, resulting in a gas supply shortfall requiring the forced curtailment of demand and diesel for gas fuel substitution for power generation.

A number of gas supply facilities were curtailed during the quarter: Varanus Island gas plant (40 TJ/d down from 250 TJ/d, from 27 November 2022); Devil Creek gas plant (47 TJ/d down from 180 TJ/d, from 5 January 2023); the Wheatstone domestic gas plant (0 TJ/d down from 175 TJ/d, 6-10 January 2023); and Pluto domestic gas plant (0 TJ/d down from 25 TJ/d, 26 November – 9 December 2022). On top of this, Santos announced the permanent retirement of the Devil Creek gas plant (~11% of WA gas supply), where the end of field life of the Reindeer and Spar gas fields have brought forward the end of supply.

Unfortunately, despite this confluence of events there was no additional supply capacity brought online to reduce the impact of the gas supply shortfall. Several major gas consuming facilities (such as ammonia plants, mineral processing facilities and gas fired power generators) were curtailed for periods of time. In order to resume normalised market operations major storage withdrawals occurred and the State intervened in gas market operations to ensure that buyers who could use alternative energy sources, and fuels, did so. This resulted in diesel for gas fuel substitution for power generation across sites throughout WA and gas consumption falling to as low as 757 TJ/d. Over the last month, when these above market effects were most acute, the WA spot gas price was projected to clear at $7/GJ, however Strike’s analysis has shown that domestic gas parcels may have been clearing at up to $10 /GJ.

AEMO WA Gas Statement of Opportunities
The report is the culmination of AEMO data collection, forecasting, and analysis that details the outlook for domestic gas supply and demand for Western Australia for the period 2023-2032. The report outlook is not a surprise and supports Strike’s strategy and competitive advantage of low cost, close to market, domestic gas production.

The forecast outlook for the 2023 to 2026 gas supply-demand balance is predicted to be tight, with a deficit of up to 50 TJ/d in 2024 or 45 PJ over the four years. Forecast shortfalls are being driven by changes in production and increased demand, including for gas-powered generation from new resource and mineral processing projects.

Domestic gas demand in WA is forecast to increase from 1,099 TJ/d in 2023 to 1,278 TJ/d in 2032, at an average annual rate of 1.7%. Gas demand for power generation in the South-West Interconnected System is forecast to grow from 127 TJ/d in 2023 to 304 TJ/d in 2032 as stateowned coal fired power stations are retired and alternative generation is required, only part of which can be currently filled by renewables. In addition, committed new resources projects in WA’s mining and minerals processing sector are also expected to add a further 43 TJ/d to gas demand by 2026.

Between 2027 and 2029, supply is expected to exceed demand by 38 PJ, assuming Woodside’s Scarborough project is brought online in the currently projected timeframe. The domestic gas market then moves into a much larger deficit from 2030 onwards in line with planned coal generation retirements and a decline in production from existing gas fields. Recent and public Collie coal supply issues have highlighted the risk that coal supply declines well before 2030 and additional gas supply may be required to fill the power generation gap much earlier than forecast.

Strike’s interpretation of the report and effect on our business strategy includes the following conclusions:
• A high potential for increased price volatility in the domestic gas market based on the uncertainty in the timeframe of new supply. This dynamic could shift into a minor surplus or a much larger deficit between 2023 and 2029 if existing supply sources decline faster than expected and or project delays occur for new gas projects.
• WA’s existing gas storage (up to 210 TJ/d) will be highly impactful going forward based on the anticipated increase in volatility noted above. Strike expects both suppliers and buyers to seek gas off-take flexibility and purchase gas storage positions, which may become increasingly valuable.
• Spot market volumes and prices are likely to increase, particularly as further gas-renewable hybrid power systems are installed across the State’s mining operations. Spot prices have already reached $7 / GJ in early 2023.
• Customer recontracting will be significant. Gas consumer contract duration has declined with only 48% (down from 67% last year) of demand being contracted for 4+ years. 52% of demand will be recontracting in the next 2 years in a tight market (this is similar to East Coast trends which are now 1 year in length).
Purchasing the Precinct and accelerating Greater Erregulla gas supply to meet domestic gas demand reinforces Strike’s strong position in the context of the domestic market dynamic forecast. Project Haber

Mid West Low Carbon Manufacturing Precinct
During the quarter, Strike completed several studies required for the planning and scheme amendment (for example the Traffic Survey and Bushfire Management Plan) for the use of the Precinct as an industrial hub versus an agricultural property. Discussions to date with the Three Springs Shire have been very positive with a high degree of alignment in the objectives of the two parties, resulting from the enormous job and local population growth that the Haber plant would bring to the Mid West region.

Strike has also continued discussions with multiple renewable power developers to undertake concept design and data gathering studies in conjunction with power offtake agreements for Strike’s industrial uses.

Project Engineering & Port Access
Strike awarded the FEED (Front End Engineering & Design) contract for Project Haber to Technip Energies. Preparation of FEED project management documentation has commenced as has licensor agreement negotiations, including technical meetings with Licensors and Technip Energies to finalise licensor basis of designs. The Mid West Port Authority commenced engineering studies on the $350 million WA Government funded Port Maximisation Project with consultation with Strike continuing towards a world class urea export solution.

Environmental Approvals
During the quarter Strike submitted the environmental referral for Project Haber together with the appropriate supporting documentation required for its key Part IV environmental approvals to WA’s Environmental Protection Agency. Seven-day comment on new referral closed on 22nd December 2022. The environmental approvals are considered the longest lead item for timely development of Project Haber.

Urea Offtake
Negotiations with Koch Fertilizers are progressing and remain on track for completion and conversion of the Terms Sheet into a Binding Offtake Agreement by the end of 1H23 as previously indicated.

Mid-West Geothermal

Power Project
Throughout the quarter, Strike worked with the regulator in order to provide additional information around the interaction of geothermal operations and that of gas or petroleum pools. This was conducted with a view to completing the requested information in order to facilitate award of the Geothermal Exploration Permit, which would allow Strike to formally conduct and test the geothermal potential in its high graded and identified area of operations. Also, during the quarter Strike became a corporate member of the Australian Geothermal Association.

Corporate During the quarter Strike’s expenditure focused on the procurement and development of the Walyering gas field, the remaining payables from the workover and testing programs of the South Erregulla Wagina gas discovery and the preparation for the Warrego merger and resulting bid.

From a financing perspective the quarter was marked by the conclusion of a competitive financing process which resulted in agreement of a $153 million domestic gas financing package with Macquarie Bank to cover pre-development and development costs across its high-quality Walyering and Erregulla domestic gas projects in the Perth Basin. The facilities are to provide Strike with the capital required to close out its journey to first gas production at Walyering and then onward to becoming a significant Western Australian gas producer via the Erregulla domestic gas project. As part of the establishment cost of the $40 million South Erregulla drilling facility, Strike has agreed to issue Macquarie Bank with 82.80 million options to subscribe for fully paid Strike ordinary shares exercisable at 36.3 cents (representing a 15% premium to the 30-day VWAP at the time of commitment) which will expire on 22 May 2025.

Strike finished the quarter with ~$56.5 million of committed funding (subject to definitive Macquarie Bank facility documentation) plus ~$75 million in Warrego shares (19.9% of WGO at 31 cents per share as at 31st December 2022). Post the quarter balance date Macquarie bank exercised a further $10.2 million of options taking total committed funding to ~$67 million for the forward 2023 program. As outlined in the attached Appendix 5B (section 6.1), $207,000 in payments were made to related parties for director fees.

This announcement is authorised for release by the Managing Director and Chief Executive Officer in accordance with the Company’s Continuous Disclosure Policy.

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