Strike Energy is an emerging petroleum play with a rapidly growing presence in the unconventional energy sector in South Australia’s Cooper Basin, where an important flow-testing and fraccing program is currently underway.
|Status: Emerging Producer|
|Size: Small Cap|
|Commodity Exposure: Oil & Gas|
|Share Price: $0.11|
|12-month Range: $0.084 – $0.16|
|Shares: 833m, Options: 41m|
|Top 20: 43%|
|Net Cash: $15.4m|
|Market Value: $92m|
|Key Parameters||Rating (✓out of 5)||Quarterly Statistics|
|Management Quality||✓✓✓✓✓||Q3 2014 Expl’n & Dev’t Spend: $6.267m|
|Financial Security||✓✓✓✓✓||Q3 2014 Admin Spend: $1.024m|
|Project Quality||✓✓✓✓✓||Exploration Spend 86%, Admin Spend 14%|
|Exploration / Resource Potential||✓✓✓✓✓||Q4 2014 Forecast Exploration Spend: $7.267m|
|Project Risk||✓✓✓✓✓||Q4 2014 Forecast Admin Spend: $1.36m|
We introduced Strike Energy to our Portfolio during March 2012 based on a series of positive initial meetings with Managing Director, David Wrench, where the company’s commercial potential became apparent. Strike Energy has undergone a major rejuvenation over recent years, comprising a revitalization of both its board and its management teams, along with a diversification away from the company’s historic focus on USA petroleum activity. The company’s primary focus is now its Cooper Basin gas acreage.
In our view, Strike Energy is one of the most prospective ‘unconventional’ energy plays available to Australian investors, something that’s reflected in the methodical manner in which it has identified its acreage, undertaken meaningful exploration activity, signed up cornerstone gas customers, and is now evaluating the commercial potential of its resources. The company has a strong and loyal shareholder base that understands the huge upside potential, but also the fact that patience is required.
The unconventional energy space within Australia does have enormous potential, but there are clear geographic and commercial considerations. Strike has deliberately targeted projects within specific locations of South Australia’s Cooper Basin, based on important fundamentals: firstly, their proximity to essential energy infrastructure and growing energy markets; and secondly the comparatively low-cost of exploration, appraisal and production activity, based on what are relatively shallow reservoir targets.
During the September quarter the company continued progress towards the next stage of production testing at its Southern Cooper Basin Gas Project (SCBGP). Strike has now reached a critical stage in the evaluation of the SCBGP, as having confirmed the presence of a highly productive, self-sourcing hydrocarbon reservoir system across extensive areas of the Southern Cooper Basin, the next key step is to understand the productive potential of the play.
Cooper Basin Testing Program
Establishing gas flows to surface would immediately position the SCBGP as one of the few new gas resources, with the potential to supply gas at scale to the Eastern Australian gas markets within the next few years.
The testing program involves the evaluation of a portfolio of five wells, four in PEL 96 (STX 66.6% stake) and one in PEL 94 (STX 35% stake). Accordingly, two additional appraisal wells within PEL 96 will be drilled and completed, with flow-testing of these wells to commence by the end of the December 2014 quarter.
The portfolio of wells encompass a range of completions across the target Patchawarra coal seams and the testing program is specifically designed to achieve the technical objective of gas-flow to surface. This multi-well program will enable a comprehensive assessment of key reservoir parameters with lower risk than a single well test and will also provide a broad range of data which will accelerate subsequent production optimization and commercial evaluation work.
Early in the quarter the company concluded the initial production testing program at the Le Chiffre 1 and Klebb 1 wells within PEL 96. Fracture stimulation and testing operations were successfully completed and the results have confirmed that the coal formations are highly productive.
Operations within PEL 96 are continuing to schedule, with production testing operations at Klebb 1 and Le Chiffre 1 underway.
Pumping operations at the Klebb 1 well-site commenced on 31st October with water production rates of up to 600 bbls of water per day being achieved during initial commissioning. Water flow rates have steadily declined with approximately 3,000 bbls of water produced to date. Reduction in reservoir pressure has also been observed with increasing gas shows noted at surface. The well is now being completed for production testing.
Pumping operations at the Le Chiffre 1 well-site commenced on 8th November 8, with commissioning ongoing. Gas shows have already been observed at surface.
The early results are very encouraging as there are lower volumes of formation water than anticipated, with good gas shows at surface. The company’s next objective is to demonstrate sustained gas flows at surface over the coming months.
Flow rates and pressure drawdown will continue to be conservatively managed to minimize potential for reservoir damage and ensure steady progress towards sustained gas flow at surface.
Within PEL 94, initial testing of the Davenport 1 well was successfully completed. Encouraging hydrocarbon shows were observed via a gas detector at surface throughout the duration of the nitrogen lift operations within the Patchawarra Vu coal zone and an estimated 90% of the frac fluid was recovered during the flow-back period.
A plug was then set and the Patchawarra Vm3 coal perforated. Based on the analysis of the data from the lower zone, the joint venture decided to proceed with flow-testing of this zone without fracture stimulation using coiled tubing and nitrogen lift. Encouraging hydrocarbon shows were again observed at surface throughout the duration of the nitrogen lift operation.
The company’s next technical objectives are to determine the reservoir pressure at which gas production commences (the critical desorption pressure), achieve sustained gas flows to surface by ongoing production testing and obtain data on gas composition and formation water production volumes.
By the end of 2014, the company plans to have a portfolio of five wells undergoing production testing across all target Patchawarra coal seams, with a range of completions as summarised in the table below:
The coals at Le Chiffre have high permeability (up to 25 mD) which, combined with 50 – 60 metres of net coal thickness in each well, result in very high productivity as demonstrated by the strong flow rates observed to date. Expectations had been for a low permeability reservoir system (around 0.1mD) with correspondingly low productivity.
Encouragingly, it appears that the coals within both wells only require minimal stimulation to flow at high rates. These permeabilities have fundamentally altered the overall understanding of the reservoir system that has demonstrated exceptional deliverability capacity. Results from these tests demonstrate that formation permeabilities within the target zones are encouragingly in excess of the company’s expectations. Formation permeability across all coal intervals is a key factor with respect to the potential commercialisation of the company’s gas resource.
Cooper Basin Project Background
Strike Energy is one of the largest permit holders within the southern Cooper and Eromanga Basins, with around 15,000 sq km of net area across six permits. The company is focused on proving-up the commercial potential of its key permits – PEL 96 (Strike 66.67%), PEL 95 (Strike 50%) and PEL 94 (Strike 35%). The strategic value of these permits, close to infrastructure and with world-class resource potential, is increasingly being recognised by participants within the Australian east coast gas business.
The Cooper Basin is known as Australia’s most prolific onshore hydrocarbon region. Since the 1970s, the Cooper Basin has supplied more than 5 Tcf of gas to Australia’s eastern and southern gas markets. The Eastern Australia gas markets are experiencing rapidly increasing gas demand due to the development of LNG for export and higher domestic demand. With limited supplies, some domestic customers have commented on an inability to contract the necessary gas volumes to meet their needs beyond 2015.
Why Cooper Basin?
The Cooper Basin has become Australia’s premier location for evaluation of unconventional resources due to the historical hydrocarbon production, extensive geologic database and existing gas processing, pipeline and service infrastructure. Strike’s Southern Cooper Basin Project is initially targeting the coal seam gas potential within permits PEL 94, PEL 95 and PEL 96.
Strike estimates that approximately 75% of the 8.2 to 21.5 Tcf prospective resource within this area is associated with the coal. The project is ideally positioned to supply the Eastern and Southern Australian gas markets with open-access pipelines passing through the permits.
Strike’s prime Cooper Basin permits (PEL 94, 95 and 96) are located on the southern flanks of the Cooper Basin. The southern flank is less thermally mature than the centre of the basin, suggesting that gas may be liquid-prone and may contain significantly less CO2. The unconventional resource within Strike’s permit areas is comparatively shallow, meaning that drilling costs are significantly lower than rival unconventional plays within the central portion of the Cooper Basin.
During H1 2012, Strike drilled two successful evaluation wells that were aimed at analyzing the coal and shale sequences within the Permian section. The Marsden 1 well within PEL 95 encountered thick coals and shales, along with the presence of heavy hydrocarbons up to pentane (C5). The Davenport 1 well within PEL 94 encountered thick shales and over 110 metres of net coal – the thickest coals yet encountered within the Cooper Basin.
At the same time, Strike’s focus shifted from the upgrading of its Prospective Resource (highlighted in the table below) to the future appraisal program for its Southern Cooper Basin Project. Subsequent activity involved included geological studies, the identification of potential well locations within PEL 96 and the commencement of well-planning activities. This work culminated during 2013 with the drilling of the Le Chiffre 1 and Klebb 1 wells within PEL 96.
Le Chiffre 1 is located approximately 4km east of the Moomba to Adelaide gas pipeline and was drilled to a total depth of 2,089 metres and cased using premium casing, which will allow the well to be fracture stimulated in the near future. A total of 105 metres of coal was encountered in the well, of which 86 metres was recovered in cores. Of note, was 46 metres of net coal within a 70-metre gross pay interval of the Patchawarra Formation.
The Klebb 1 well is located approximately 4km west of the Moomba to Adelaide gas pipeline and approximately 8km to the north-west of Le Chiffre 1. The well was drilled to a total depth of 2,193 metres and was cased and cemented just after the period ended. A total of 147 metres of coal was encountered by the well and observed via wire-line logging. In particular, 89 metres of coal was observed within the Patchawarra Formation, including one 34-metre thick seam and two seams over 15 metres thick.
Sizeable Resource Upgrades
Following the completion of the PEL 96 appraisal drilling program, Strike Energy announced during February 2014 an increase in the Pmean (best) estimate prospective resource within PEL 96 to 6.8 Tcf (recoverable sales gas), of which 4.5 Tcf is net to Strike.
PEL 96 forms a significant component of the Strike’s Southern Cooper Basin Gas Project and Strike is focused on the rapid commercialisation of a portion of the resource within the Phase One Area of the permit. This 141 sq km area is centered directly under the Moomba to Adelaide Gas Pipeline. Within the PEL 96 Phase One Area, the Company’s Pmean (best) estimate of the prospective resource has increased to 1.2 Tcf (recoverable sales gas, net to Strike). Notable increases in gas readings were recorded in both wells whilst drilling through the coals and these gas readings increased with depth.
The PEL 96 Joint Operating Committee is currently proceeding with the first phase of the Pilot Production Test Project, which has involve a multi‐stage fracture stimulation of the target Patchawarra coals in each of the Le Chiffre 1 and Klebb 1 wells, with the wells now undergoing flow-testing and extended production testing.
In addition, the PEL 94 Joint Venture (STX 35%, Beach Energy Ltd (ASX: BPT) 50% and Operator, Senex Energy Ltd (ASX: SXY) 15%) has committed to fracture stimulation and extended production testing of the Patchawarra coals within the Davenport 1 well, which lies within the adjacent permit to PEL 96.
The three wells to be drilled across PEL 96 and PEL 94 will be fracture-stimulated back-to-back in a coordinated program. The initial goal of the first phase of the PPTP program is to demonstrate that the Patchawarra coals within PEL 96 are capable of sustained gas flows to surface.
Improving Gas Market Fundamentals
The gas market in Eastern Australia is transitioning from supply-driven to demand-driven conditions, with commercial and industrial gas consumers increasingly concerned about their ability to secure gas supply contracts beyond the 2015/16 start-up of the three Gladstone LNG export projects. Strike’s Southern Cooper basin gas and liquids resource is ideally located to supply gas directly into this market, taking advantage of existing open-access and under-utilised gas pipeline infrastructure.
Expanded Gas Sales Agreement
Strike recently entered into a Gas Sales Agreement (GSA) for 45PJ of gas with Orora Limited (ASX: ORA), which adds a further 15PJ of gas to the 30PJ agreed with Orora earlier this year. The additional gas has been contracted on the same terms at a fixed rate of supply over a 10-year term from 2017, the expected commencement of production from the Southern Cooper Basin Gas Project within PEL 96.
The GSA complements the foundation contract for up to 250PJ of gas with Orica, announced during March 2014 and the Gas Supply Option Agreement with Austral Bricks for 12.5PJ of gas, announced during February 2014. With aggregate contracted off‐take of 307.5PJ (net to Strike) and a balanced portfolio of fixed price, market linked and production cost based tariffs, the Southern Cooper Basin Gas Project is positioned for rapid commercialisation.
Few companies offer investors such high quality exposure to the huge untapped potential of unconventional energy within the Cooper Basin. Most importantly, the company’s exploration and appraisal costs for the foreseeable future are fully funded and it has keen buyers lined up for future gas production. We look forward with great anticipation to the results of the company’s current flow-testing program, which hopefully will demonstrate commerciality of the gas within the Patchawarra coals. We maintain an Accumulate recommendation on Strike Energy around current price levels.