Perth Basin proves gas has a big future despite the doomsayers

Mineral Resources gas exploration in the Perth Basin. Pics courtesy of Mineral Resources.

Contrary to some predictions over the past 18 months, investing in new Australian gas turns out to be one of the most exciting prospects for 2023.

The Perth Basin in Western Australia is the best on-land gas discovery in at least a decade. That is why the current battle for Warrego Energy between ASX-listed Strike Energy and Gina Rinehart’s Hancock Energy, with billionaire Chris Ellison’s Mineral Resources now the kingmaker, has become so willing.

But this could well be just the beginning of M&A action in the Perth Basin over the next 12 months that draws in more of the big gas players.

Between Ryan Stoke’s Beach Energy, Japanese giant Mitsui, and Strike and Warrego, trillions of cubic feet have been found across the Perth Basin.

On cost of production, the resource is expected to compete with both Qatar and the US. At the moment however, developers are intent on building their own gas plants – Beach and Mitsui’s Waitsia plant is well underway. MinRes also has a discovery at Lockyer Deep that it plans to develop. And this infrastructure overbuild in the Basin begs rationalisation through takeovers.

The Perth Basin sits between two major population centres in Perth and Geraldton, close to electricity transmission infrastructure and will soon boast a gas pipeline to the WA Goldfields. The potential for this resource to power new manufacturing from lithium processing to urea for fertiliser and eventually hydrogen is tantalising.

Elsewhere in Australia energy transition looks increasingly challenging: The billionaire scrap between Mike Cannon-Brookes and Andrew Forrest over exporting electrons to Singapore grabs headlines and the market is still grappling with the government’s price cap on carbon, changes to the Safeguard Mechanism for big polluters and the $12 a gigajoule cap on the wholesale gas price. And on Monday Santos’s long awaited Narrabri project hit yet another hurdle with a last-minute appeal over native title consent.

But the west is developing now and it is fast-moving territory. Who would have thought that in 2023 Western Australia could be tight on gas supply? The sudden writedown by Santos of its Reindeer field in February last year, which accounted for 15 per cent of WA market, has changed the market dynamics and bumped up contract prices markedly.

Then there is the politics. Beach and Mitsui both managed to lock in a sweetheart deal with the state government for their giant Waitsia field which permits them to export 50 per cent of the gas, with exports to be sold upfront in the first five years, followed by domestic sales.

The state government may argue that the deal was made when supply was plentiful, but it nevertheless puts pressure on it to justify why other Perth Basin players should not receive the same treatment.

One scenario is that the WA government decides to allow the newer Perth Basin developers to supply both export and domestic markets 50/50 but delivering at the same time, in order to secure domestic supply. Credit Suisse’s Saul Kavonic believes such a move would ramp up investment and development.

This then, is the extraordinary backdrop to the current Warrego Energy takeover action.

Warrego’s main asset is West Erregulla which it owns 50/50 with Strike Energy. Strike is also the operator.

Strike has put to Warrego shareholders a now unconditional all-scrip offer which in value terms is superior to Hancock’s upped all-cash offer of 36c a share. Strike has 19.9 per cent of Warrego, and as at Monday Hancock had 26.1 per cent in acceptances. It needs to reach 40 per cent.

For Warrego shareholders, the cash offer provides certainty, but Strike offers ongoing upside in the Perth Basin.

Ellison is holding his cards close to the chest. To help develop Lockyer Deep, MinRes might be looking to tap into neighbour Warrego’s infrastructure. But Ellison’s close relationship with his customer Gina Rinehart shortens the odds of a Hancock victory. On Tuesday MinRes bought another $13.6m worth of Warrego shares, lifting its holding to 19.2 per cent.

Worth noting since the Hancock offer opened is that a significant portion of Warrego shares has traded above the 36c Hancock offer, suggesting that the market anticipates a yet higher bid or favours the Strike offer.

Whatever the final outcome, Strike CEO Stuart Nichols and chair John Poynton will have done a good job for both Warrego and Strike shareholders, pushing up the cash bid from Hancock.

And if Strike loses the takeover and sells all its Warrego shares to Hancock then Rinehart will have supported a capital raise for Strike. That is thanks to Strike’s one-for-one share swap with Warrego in December to build its holding to almost 20 per cent. At 36c a share, those same Warrego shares will have increased by more than 15 per cent.

Within the next 12 months, Strike itself could be in play. The company’s Walyering project starts up this quarter, bringing the first free cash flow. Its fully owned South Erregulla field so far has only one well. Assuming the resource is proven up with further wells, investor interest will only grow.

Strike also has a proposed urea manufacturing facility in Geraldton and the Basin rights to development of geothermal power sitting beneath the gas.

Poynton and fellow Strike board member Nev Power could find themselves fielding takeover bids from the likes of Rinehart, Stokes (who earlier pulled out of a bid for Warrego) or Forrest.