Upcoming South Erregulla Gas Station Will Capture Market Share By 2026

Key Takeaways

• Strategic initiatives in project portfolio monetization and South Erregulla positioning enhance potential revenue and operational efficiencies.
  
• Favorable market conditions and resource expansion opportunities promise increased future earnings and net margins.
  
• Uncertainties in project direction, funding, and asset divestment may hinder Strike Energy's growth and revenue potential, reflecting low investor confidence.

Catalysts

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

• Strike Energy has initiated a strategic review to determine how to best monetize its project portfolio, which could lead to increased operational efficiency and asset optimization. This aim to maximize value is likely to positively impact future revenue and earnings.
  
• The final investment decision for the 85-megawatt South Erregulla peaking power gas station, set to be operational by October 2026, demonstrates strategic positioning to capture market share, potentially increasing future revenue streams.
  
• Discovery and flow testing at Erregulla Deep and contingent discovery at Walyering East-1 signify promising resource expansion opportunities, which can significantly enhance revenue and earnings once commercialized.
  
• All environmental approvals for West Erregulla are obtained, easing the path to potential future production, which could improve operational timelines and enhance future revenue and earnings.
  
• Increasing market fundamentals, such as higher capacity credit pricing and the demand for gas-generated electricity, particularly in the wake of the shift from coal by 2030, create favorable conditions for Strike’s upcoming projects, likely leading to better net margins and overall earnings.

Strike Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Strike Energy's revenue will grow by 59.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.8% today to 33.5% in 3 years time.
• Analysts expect earnings to reach A$62.0 million (and earnings per share of A$0.02) by about February 2028, up from A$8.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$119 million in earnings, and the most bearish expecting A$23 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 78.5x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 2.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Strike Energy Future Earnings Per Share Growth

Risks

• The planned strategic review, while intended to maximize value, suggests potential uncertainty over the direction of Strike Energy's projects, which could impact investor confidence and hinder revenue growth as projects might take longer to come to fruition.
  
• Funding for the West Erregulla development is uncertain due to pending undrawn debt, potentially impacting the timeline and cost of the project, which could adversely affect earnings if the funding issues are not resolved.
  
• With the announcement that some projects might be divested, there is a risk that Strike might sell assets at unfavorable prices in the short term, which could negatively affect long-term revenue and earnings potential.
  
• Delays and dependencies related to partner Hancock's drilling activities could postpone the final investment decision on West Erregulla, impacting project timelines and potentially affecting short to mid-term revenue.
  
• The market is not attributing value to certain assets like Ocean Hill, suggesting a lack of investor confidence or market interest in these resources. This undervaluation could affect Strike's market position or funding capability, impacting future revenue streams.

Valuation

• The analysts have a consensus price target of A$0.27 for Strike Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.31, and the most bearish reporting a price target of just A$0.21.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$185.2 million, earnings will come to A$62.0 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of A$0.24, the analyst's price target of A$0.27 is 12.7% 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.