Perth Basin Gas Expansion Will Fuel Energy Transition

Key Takeaways

• Rapid scaling, strategic investment, and aligned gas assets position the company for higher recurring cashflows, organic growth, and robust long-term revenue.
  
• Becoming a fully-integrated gas-to-power provider could create a lasting structural margin advantage and pricing power in a tightening Australian energy market.
  
• Reliance on natural gas, mounting ESG pressures, execution risks, and dependence on major capital infusions threaten Strike Energy's earnings stability and long-term asset viability.

Catalysts

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

• Whereas analyst consensus focuses on the South Erregulla peaking plant delivering margin expansion and new revenue by October 2026, there is now visible scope for near-term upside from a 15-megawatt expansion and more rapid scaling to meet WA's accelerating capacity shortfall, potentially unlocking higher-than-expected recurring cashflows and net margins.
  
• Analyst consensus highlights the integrated gas-to-power model as reducing CapEx and OpEx, but this overlooks the potential for Strike to become the first fully-integrated gas-to-power provider in Australia, capturing a permanent structural margin advantage and commanding premium pricing power in a tightening domestic gas and electricity market-substantially boosting long-term EBITDA and net profit.
  
• The newly-secured $88 million strategic investment from Carnarvon not only removes near-term funding risk but positions Strike to fast-track appraisal and development at multiple projects simultaneously, enabling a step-change in reserve upgrades and production growth which will compound future cash flow and asset value as global gas demand rises.
  
• Strike's gas assets are directly aligned with a multi-decade trend of increased demand for flexible, domestic energy solutions as Australia and Asia transition away from coal, providing the company with a durable platform to lock in long-term sales contracts at elevated prices-supporting robust revenue growth and enhancing earnings visibility.
  
• Continued success in nearfield exploration and 3D seismic at Ocean Hill and Walyering West offers the real prospect of significant organic resource expansion and reserve upgrades, extending field life and raising asset NAVs well beyond current market expectations-fueling sustained revenue and potential re-rating of the stock.

Strike Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Strike Energy compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Strike Energy's revenue will grow by 18.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -24.4% today to 31.3% in 3 years time.
• The bullish analysts expect earnings to reach A$38.4 million (and earnings per share of A$0.01) by about September 2028, up from A$-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 bullish analyst cohort, the company would need to trade at a PE ratio of 22.6x 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 14.6x.
• 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 6.68%, as per the Simply Wall St company report.

Strike Energy Future Earnings Per Share Growth

Risks

• Long-term decarbonisation policies and accelerating net zero commitments may erode long-term demand for natural gas, threatening Strike Energy's future revenue streams and creating risk that its core asset base becomes stranded.
  
• Rapid improvements and declining costs in renewables such as wind, solar, and battery storage are likely to render gas-fired power less competitive, leading to downward pressure on Strike Energy's market share and future revenue potential.
  
• Stakeholder and investor ESG pressures heighten the possibility of restricted access to affordable capital, which could drive up Strike Energy's cost of capital and limit its ability to fund projects, ultimately affecting its earnings and valuation.
  
• Persistent execution risks, including regulatory, permitting, and cost overrun issues in Western Australia's Perth Basin, have already manifested as a 10% rise in South Erregulla project costs and could lead to further delays or overruns that negatively impact margins and earnings predictability.
  
• The company's high reliance on major capital infusions, like the recent $88 million placement, combined with its concentrated asset base, increases exposure to regulatory, geological, and funding risks that could amplify revenue volatility and raise the risk of shareholder dilution, undermining both earnings per share and long-term return on equity.

Valuation

• The assumed bullish price target for Strike Energy is A$0.22, which is the highest 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.22, and the most bearish reporting a price target of just A$0.15.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$122.6 million, earnings will come to A$38.4 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 6.7%.
• Given the current share price of A$0.1, the bullish analyst price target of A$0.22 is 51.5% 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.