Decarbonization Trends Will Curtail Gas Role Yet Spur Modest Resilience

Key Takeaways

• Future growth faces significant risks from stricter climate policies and accelerating renewable energy advancements, potentially capping revenue and reducing gas market relevance.
  
• High project costs, regulatory challenges, and concentrated asset risk threaten sustained earnings, stable production, and access to necessary capital.
  
• Dependence on timely project execution, concentrated assets, capital access, and exposure to regulatory and ESG pressures threaten revenue reliability and future earnings growth.

Catalysts

An independent gas producer, explores for and develops oil and gas resources in Australia.

• While Strike Energy is positioned to benefit from growing regional demand for domestic natural gas amid a well-documented supply gap in Western Australia, its future growth is exposed to escalating decarbonization policies and the risk that more aggressive government climate mandates may ultimately curtail gas-fired power opportunities, which could cap revenue growth in its core markets.
  
• Although the ongoing electrification of energy systems and intermittent renewable generation strengthens the argument for gas as a critical transition fuel, rapid advancements and falling costs in energy storage and renewables could accelerate the displacement of gas in electricity generation, limiting future market relevance and eroding long-term realized sales.
  
• While recent asset commercialization and integration into power generation create potential for higher margins and diversified earnings, the capital intensity and cost inflation-exemplified by the unplanned 10% increase in South Erregulla and unresolved Western Power infrastructure charges-pose ongoing risks to net margins and free cash flow, undermining sustained earnings improvement.
  
• Despite securing strategic capital from Carnarvon to fund current development and exploration, Strike's reliance on timely reserve growth in a geographically concentrated asset base means any exploration disappointments in projects such as Ocean Hill could threaten long-term production volumes, putting pressure on both revenue continuity and debt servicing ability.
  
• While Strike's new assets and disciplined spending position it as a lower-emission, efficient producer in theory, heightened regulatory scrutiny-ranging from local project approvals to broader ESG-driven finance restrictions-may increase compliance costs and hinder access to capital, impacting long-run project economics and the company's capacity to deliver on growth ambitions.

Strike Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Strike Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Strike Energy's revenue will grow by 33.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -24.4% today to 15.0% in 3 years time.
• The bearish analysts expect earnings to reach A$26.1 million (and earnings per share of A$0.01) by about August 2028, up from A$-17.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, up from -19.4x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 13.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Strike Energy Future Earnings Per Share Growth

Risks

• Strike Energy remains heavily dependent on timely execution of its core projects such as South Erregulla and the West Erregulla gas developments, and any delays or cost overruns-such as the reported increase in grid connection costs or reliance on partner approvals-could erode free cash flow and reduce net margins over time.
  
• The company requires ongoing access to significant capital, as evidenced by the critical need for both tranches of the Carnarvon placement and supplementary funding; failure to secure or delays in securing these funds would constrain development, impede exploration, and increase funding costs, negatively impacting future earnings growth.
  
• Strike's asset concentration in the Perth Basin exposes it to production and reserve risks, including the potential for reserve depletion, dependence on successful exploration at Walyering and Ocean Hill, and the risk that unsuccessful drilling could sharply curtail future revenue streams and long-term production profile.
  
• Exposure to regulatory and environmental approvals, particularly for infrastructure connections and drilling activities that impact native vegetation, creates risk around project timelines and may drive compliance costs higher, putting pressure on both capital expenditure and operating expenses and ultimately weighing on net margins.
  
• Long-term global secular trends toward decarbonization, electrification, and investor ESG mandates threaten to reduce the competitiveness and relevance of natural gas as a transition fuel, potentially leading to lower realized prices, higher capital costs, and declining institutional support, all of which could negatively impact Strike's revenue growth and share price valuation in the long run.

Valuation

• The assumed bearish price target for Strike Energy is A$0.16, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Strike Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.3, and the most bearish reporting a price target of just A$0.16.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$174.0 million, earnings will come to A$26.1 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 6.6%.
• Given the current share price of A$0.1, the bearish analyst price target of A$0.16 is 34.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.