Strike Energy still a Buy despite recent setback
Property stock Desane Group rated Outperform
Strike Energy still a Buy despite gas well issues
Goldman Sachs says its recommendation on Strike Energy (ASX:STX) remains unchanged despite Strike’s announcement on February 13 which revealed a problem at one of its gas wells, South Erregulla-3 (SE-3).
Goldman maintains its Buy rating on the stock with a 50c price target, versus the current price of 29c.
Last week, the $845m market-capped Strike reported that it failed to produce expected gas rates during flow testing of SE-3, and that the well may have encountered a gas-water contact within the reservoir.
Upon opening the choke, the well failed to flow but was also observed to be substantially overbalanced. Strike proceeded to plug off the zones and mobilise nitrogen to displace the well fluid, and move the well into an under-balanced state.
The well was then shut-in and a steady increase in tubing head pressure and associated temperature drop was subsequently observed, where bleed offs of pressure/gas were detected as hydrocarbons.
Following this, Strike ran slickline where it observed a fluid level at ~250m from the surface, which indicates that reservoir fluid had been produced.
Strike interprets this as having encountered a possible gas-water contact in the SE-3 well, and as we know, water encroachment usually decreases reservoir life, limits productivity of wells, and elevates safety risks in gas production.
Following the announcement, STX shares sold massively that day.
“We consider the 25% sell-off an overreaction,” said the note out of Goldman Sachs.
Goldman says that it had already assigned a 50% risked weighting on the South Erregulla contingent resources to begin with (up to 271 PJ 2C gas associated with the SE-3 and SE-2 wells).
“While all appraisal activity carries high levels of uncertainty and risk, we are surprised by the interpretation of a possible gas-water contact given petrophysical properties observed in SE-3 were considered similar to SE-1,” noted Goldman.
STX now expects to move to the up-dip SE-2 well, which is ready for production testing, and flow testing will begin soon.
Goldman believes that SE-2 is generally considered lower risk with higher quality reported reservoir properties than SE-3.
“Given the depth being tested [in SE-2] is shallower than SE-3, results could potentially identify the gas-water contact level and provide an improved understanding of reservoir pressure gradients and fluid volumes.”
“We remain Buy rated with our 50c price target accounting for risked conversion of resources to reserves, though look for updates from SE-2 testing to assess South Erregulla resource conversion success.”
Desane Group to Outperform
Meanwhile, Taylor Collison has initiated coverage on Desane Group (ASX:DGH), slapping the stock with an Outperform rating with no price target.
Desane is a $36m market capped company which operates as an investor and developer of Australian property.
The group is focused largely on industrial property assets, however, is also experienced in commercial and residential development.
It operates predominantly in Sydney where it has familiarity with the market, zoning regulations and other market operators.
DGH owns a small number of income-generating assets, which include 91 Thornton Drive, Penrith NSW (book value $10m), 159 Allen Street, Leichhardt NSW (book value $23m), and 270-278 Norton Street, Leichhardt NSW (book value $9.2m).
Taylor said DGH is an attractive stock due to several reasons.
First, it has a very low net debt of just $0.3m at 30 June, compared to its $82m in property assets and development inventory.
Secondly, the company has a largely unencumbered project pipeline that should create development activity for the next five years. Its pipeline includes the Penrith Lot 1 project, which is set to commence in FY24.
“We expect this project to now commence in 2H24 with the ~7,000m2 Lot 1 development, which is an important catalyst for DGH to restart development activities,” said the note from Taylor.
“DGH holds a pipeline of ready-to-develop projects, mostly unencumbered, which can be developed largely from cashflow pending the successful development and sale of Lot 1, mitigating debt risk for shareholders.”
The company also has an experienced management team that has demonstrated sensible protection of shareholder capital in recent years.
DGH has traditionally been a dividend-paying stock, distributing payouts to shareholders in FY19,FY29, and FY21, before Covid temporarily stalled them.
“As the cost of construction now appears to be stabilising, DGH have highlighted the reinstatement of dividends as a key priority for the group…” said Taylor Collison.
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The views, information, or opinions expressed in the interview in this article are solely those of the brokers and do not represent the views of Stockhead.
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