Take up entitlement
Woodside Petroleum (ASX:WPL) announced on 14 February 2018 that it was raising up to A$2.5 billion by way of a pro rata accelerated renounceable entitlement offer to its shareholders. The Retail Information Booklet setting out the details of the entitlement offer was forwarded to eligible shareholders on 22 February 2018. The funds raised under the offer will be used to acquire a further interest in the Scarborough natural gas field in Western Australia. The following figure shows the location of the Scarborough blocks, the natural gas field (Woodside Petroleum’s interest 25% pre the acquisition and increasing to 50% or 75%) and the Thebe and Jupiter fields (not included in the transaction) are shown:
Source: Woodside Petroleum (ASX:WPL)
The shareholder entitlement offer is a pro rata accelerated renounceable entitlement with a ratio of one (1) new share for every nine (9) shares already held. The issue price has been set at A$27.00 per new share. The eligibility date to participate in the entitlement offer was 19 February 2018. Details regarding additional eligibility criteria are contained in the Retail Information Booklet.
The Retail Information Booklet containing the details of the entitlement and acceptance form was forwarded to eligible shareholders on 22 February 2018. The offer period opened on 21 February 2018 and will close on 7 March 2018. Settlement of retail entitlements taken up will occur on 12 March 2018. The shareholder capital raising is fully underwritten to ensure the company receives the funds it requires to complete the Scarborough acquisition.
A shareholder’s right to the entitlement offer was renounceable and could be sold on the Australian Stock Exchange (ASX); we recommended eligible Members not sell their entitlement. ASX trading of the entitlements ceases on 28 February 2018. Entitlements not taken up prior to the close date of the offer or sold on the ASX will be sold through a company arranged retail entitlement book build.
Shareholder entitlements sold through the book build facility will receive the difference between the sale price less the A$27.00 entitlement price. Should the sale price be insufficient to cover the A$27.00 entitlement price, no shortfall will have to be made-up by the shareholder.
Turning to the daily chart, a zone of support is located between $27.79 and $28.38, if the bears were to maintain control over the near-term. This is made up of the September 2017 low (horizontal solid-blue line) and the February intra-month low (horizontal thin-blue line) respectively. Positively, the steep decline in share price has resulted in the RSI to decline into oversold territory, which implies that the bears could be beginning to run out of steam. In order for the short-term technical outlook to improve though, a sustained break above the 200-day moving average (green line) of $30.41 is required. Should this favourable scenario unfold, then further upside is expected over the medium-term.
New shares allotted under the entitlement offer will be issued to participating Members accounts on 15 March 2018. The new shares will carry the same rights as existing shares already on issue. Normal trading in the new shares will commence on the ASX on 19 March 2018.
The funds raised will be used to acquire a further interest in the Scarborough natural gas field. The company has moved to acquire a further 50% interest in the Scarborough natural gas field for US$444 million and a contingency payment of US$300 million on a final investment decision (FID).  Funds raised will also be used to progress the Browse field (Woodside’s interest 31%) to a FID.
The company has already successfully raised A$1.6 billion of the A$2.5 billion it is seeking. Institutional investors were required to settle entitlements on 15 February 2018. The company received overwhelming support from its institutional shareholders, with 90% acceptances.
The funds raised will be used to acquire a further 50% interest currently held by ExxonMobil in block WA-1-R that hosts the Scarborough natural gas field. The current interest in block WA-1-R is ExxonMobil 50%, BHP Billiton (BHP) 25% and Woodside Petroleum 25%. The following figure highlights block WA-1-R:
Source: Woodside Petroleum (ASX:WPL)
Completion of the acquisition is subject to conditions and approvals. We expect on the approvals front to see no barriers. Regarding the conditions, a key condition is the right of BHP Billiton (BHP) to pre-empt the Woodside acquisition. Should BHP exercise this right, Woodside Petroleum’s interest in block WA-1-R would increase to 50%. Should BHP not exercise its right Woodside Petroleum’s interest in block WA-1-R will be 75%. On this condition, BHP did in 2016 sell down part of its interest in block WA-1-R to Woodside Petroleum for US$400 million. Little has changed in the preceding time with the Scarborough field except for the price of natural gas which has fallen. The Henry Hub natural gas price in September 2016 was US$2.97 per British thermal unit (Btu) with the price now trading around US$2.61 per Btu. BHP may not, in our view, exercise its right. The other conditions pertaining to the acquisition appear to be less intrusive on its completion. The acquisition is expected to complete in the March quarter 2018.
The Scarborough field is a proven natural gas field with a gross 7.3 trillion cubic feet of natural gas classified as a 2C resource. A 2C resource is the mid-estimate of natural gas that could be recovered and is a speculative number. Initial commercialisation was for a US$10 billion floating processing facility capable of producing six to seven million tonnes of liquid natural gas (LNG) per annum. The field is expected to have a life in the range of 25 to 35 years.
Following completion of the current acquisition, the partners will move to a FID on the Scarborough field and the Thebe and Jupiter gas fields. We are comfortable with the acquisition given Woodside Petroleum already has an involvement in the field. The following figure shows the offshore north west coast Western Australian oil and gas fields, pipelines and processing facilities with the Scarborough field highlighted (left), the Pluto platform (centre, Woodside’s interest 90%) and the Pluto LNG facility (right, Woodside’s interest 90%):
Source: Woodside Petroleum (ASX:WPL)
With the facilities in the region and advances in technology, in both processing and transporting, optionality around developing the Scarborough field opens up; saving the partners time and valuable capital.
At the same time as the Scarborough acquisition was announced, the company released its 2017 full year results. The following table is a summary of the company’s 2017 result:
Source: Woodside Petroleum (ASX:WPL)
We will cover off on the result in a separate review to follow shortly.  In brief, the key takeaways relative to the acquisition are the liquidity in the balance sheet and gearing and the company’s free cash flow. We believe the company is in an excellent financial position to advance the Scarborough field. Overall, the result was a solid one and will not impede the company’s endeavours regarding the Scarborough acquisition.
With reference to the monthly chart, prices have entered a corrective phase of the overall technical cycle after printing a recent high of $34.52 in January. Should the bears remain in control over the near-term, then a layer of downside support is evident between $23.51 and $25.82 (horizontal dashed-blue line). This is made up of the April 2016 and November 2008 lows respectively. In the grand scheme of things, we view this type of price action as healthy, considering the advance witnessed since September 2017. Therefore, once this pause in trend is complete, we would envisage a broader upwards rotation towards resistance, located at the 61.8% Fibonacci retracement of $35.96 (red set of retracements).
Consequently, we recommend eligible Members take-up their entitlement to new shares in Woodside Petroleum at A$27.00 per new share. Members should action our recommendation just prior to the close date of 7 March 2018. The Retail Information Booklet contains the application form and the necessary instructions to allow Members to accept the entitlement offer.
In the meantime, we continue to recommend Woodside Petroleum (ASX:WPL) as a buy for members with no exposure to the stock.
Disclosure: Woodside Petroleum (ASX:WPL) is held within the Fat Prophets Mining & Resources portfolios.
