Warrego Energy’s Striking Valuation Discount
Link copied to
Special Report: Warrego Energy, currently trading at a massive valuation discount to its JV partner Strike, offers much cheaper exposure their 50:50-owned prized West Erregulla Project in WA- set to be drilled in Q3 this year.
Warrego Energy (ASX: WGO), trading at approximately 40% of the market value of its joint venture partner Strike (ASX: STX), is on schedule to begin appraisal drilling on their prized 50:50-owned West Erregulla Project in the third quarter of this year.
The upcoming drilling program, which is well-funded thanks to the recent heavily oversubscribed $15 million placement made by the Company in May, will target drilling of up to three wells (WE-3, WE-4 and a contingent WE-5) in the Perth Basin at West Erregulla, currently sitting at an independently verified 513 billion cubic of feet of gas with significant upside potential.
WGO’s current share price of $0.17, values the Company at around $141 million offering significantly cheaper exposure to the West Erregulla Project than Strike, which is currently valued at just over $350 million.
With both companies now in a similar net funding position, and despite both companies having an equal share in the same principal asset (West Erregulla), the market continues to value WGO at a whopping 60% discount to its JV partner on an Enterprise Value basis, after adjusting for other assets based on public valuation estimates.
In their latest independent report on WGO, Bridge Street Capital’s energy analyst, John Young, points out that the striking difference in market valuation between the two companies appears to be attributed to STX’s “operatorship of the asset (West Erregulla), and its (unexplored) adjacent acreage (in the Perth Basin)”, which Young suggests is “an unreasonably high premium to assign (STX).”
In simple terms, the market may be assigning value to STX’s dream of a “Greater Erregulla play” factoring in STX’s acreage position south of the West Erregulla discovery. WGO, however, has its own similar ambitions in the region with the vast 2.2m acre EPA-0127 permit under application to the north of West Erregulla, and is making significant progress with Native Title negotiations prior to engaging formally with potential farm-in partners.
Further clouding any logic behind the valuation premium was the write down STX recently took of its original core JAWS asset in the Cooper Basin. After many years attempting to get the gas pilot project to work, STX this month wrote down its carrying value by $91 million – approximately one third of the value of its current market cap.
Another piece of the puzzle is the large difference in resource size estimates at West Erregulla, highlighted in a recent report by Canaccord analyst, James Bullen. It is not unusual for partners to have different resource numbers based on their respective reserves verification methodology and that appears to be the case here. Following drilling and testing of the WE-2 well, Strike released its own field estimate of 1.185 Tcf while WGO, anticipating the requirements of potential gas customers, appointed a third party (RISC Advisory) to develop an independent certified view of resources. According to Bullen, RISC “has independently certified 513 Bcf of 2C at WE”, which is an excellent result from a single well.
Bullen suggests the disparity is related to technical assumptions regarding the depth of the gas-water contact, the treatment of the northern area of the resource, and differences regarding the recovery factor. RISC and Warrego classified the Northern Area as exploration which resulted in a lower recovery factor and the company’s intention is to assign resources to the Northern Block after WE-3 has been drilled.
Warrego’s CEO & MD, Dennis Donald said, “Independent third-party certification…provides a high level of certainty to prospective gas buyers as well as potential suppliers and stakeholders. It also enables Warrego to target optimal outcomes when negotiating gas sales and processing arrangements.”
Importantly for WGO, the imminent drilling of WE-3 and WE-4 could see the company tap into significant potential resource upside. WE-3, due to spud in Q3 2020, has a high 65% GPOS success factor ascribed to it by WGO.
WGO’s Spanish Tesorillo asset, on the other hand, is a play that is probably under appreciated by investors. It covers a 380 square kilometre permit in Southern Spain and hosts the historical Almarchal-1 gas discovery, of which WGO owns an 85% interest. The size of the prize at Tesorillo is massive, “estimated to host around 830 BCF gross unrisked prospective resources”- according to a report by Netherland Sewell. Further, John Young values Warrego’s Spanish asset on an unrisked basis at 65c per share- over two times its unrisked valuation of WGO’s West Erregulla discovery.
Unlike STX’s 100% domestic assets, WGO’s Spanish assets (Tesorillo and El Romeral) seem to be discounted because they lie outside of Australia, even though they are confirmed discoveries, have independent resource evaluations, and have producing wells. In particular, WGO’s “El Romeral asset has some low hanging fruit which, if more wells were drilled, could add an immediate revenue stream” according to WGO CEO, Dennis Donald.
WGO’s Board earlier this year rejected an offer by Strike to purchase all of WGO’s shares for an all-scrip consideration of 1.2 Strike shares for each WGO share, saying “The proposal undervalued Warrego and its other valuable assets including its Tesorillo project in Spain.”
So why the massive discount? Beats us- looks like Warrego Energy is the one to strike!
This article was developed in collaboration with Warrego Energy, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.