Woodside has the potential to be a truly great Australian company. It invests billions of dollars in incredibly complex, long lead time oil and gas projects that involve huge feats of engineering, usually in partnership with one or more of the global resource giants. And it’s doing it for Australia.
But unfortunately, it has struggled to live up to this potential. Over its 40-plus years of being a listed company, it has disappointed shareholders more often than it has delivered. Maybe this is why Shell finally quit Woodside last November, when it sold its final tranche of shares at $31.10 per share. After trying to buy 100% of Woodside in 2001 and being famously rejected by the then Treasurer Peter Costello on “national interest grounds”, it sold its first tranche of 10% of Woodside in 2010 at $42.23 per share. It sold another tranche of 9.5% in 2014 at $41.35 per share, before the final sale of 13.5%.
Four months’ after Shell’s exit, Woodside is tapping shareholders for $2.5 billion through a renounceable entitlement issue, the biggest capital raise by a listed company over the last two years.
Should you take up your entitlement, or as some shareholders might suggest, put more good money in after bad?
Firstly, let’s look at why Woodside is raising the capital.
Boosting reserves and production to meet a global LNG supply gap
Ostensibly, the capital raising is about improving Woodside’s ability to respond to a global LNG supply gap. It argues that this gap will start to emerge in the early 2020s and onwards as the market tightens. The following chart from Woodside shows “committed supply” in blue and expected demand (red line).
To improve its capacity to supply LNG, Woodside is raising $2.5 billion, which it proposes to spend as follows:
- Firstly, to acquire an additional 50% interest in the Scarborough gas field off the north-west coast of WA. Woodside currently owns 25%, BHP 25% and Exxon Mobil 50%. Woodside will buy Exxon Mobil’s 50% for US$444 million (about $A562 million) and a further payment of US$300 million contingent upon a positive final investment decision in 2020;
- To support the development of a field off Senegal where Woodside has a 35% interest. A final investment decision is due in 2019 and first oil in 2022;
- Progress the proposed Browse development to a targeted final investment decision; and
- Maintain prudent financial position by lowering gearing.
The rational for acquiring a 75% majority interest in Scarborough and sharing ownership of that resource with just one joint venture partner is that it gives greater alignment, certainty and control of the project. Woodside believes that Scarborough can leverage a “brownfield expansion” of its existing onshore Pluto LNG liquefaction facility near Karratha.
Shareholder options
Woodside is raising $2.5 billion through a 1 for 9 renounceable entitlement issue to acquire new Woodside shares at $27.00 per share. Fractions are rounded up, so if for example you have 1,000 Woodside shares, you will receive an entitlement to buy 112 new shares.
The first part of the issue, the offer to institutions, was complete last week. It raised $1.57 billion. The retail offer, which is fully underwritten, is set to raise $0.96 billion.
Shareholders have three choices. Firstly, you can accept the offer (for all or part) and purchase new shares at $27.00. Payment must be made by 5.00pm on Wednesday 7 March.
Secondly, you can sell your entitlement on the ASX. Trading, under stock code WPLR, ceases this Wednesday (28 February).
The third option is to “do nothing”. In this scenario, your entitlement will be sold through a retail shortfall bookbuild to be held on 12 March. If the bookbuild clearing price is greater than $27.00, then you will receive the amount more than $27.00 (or the premium) via a refund, which is expected to be paid on 21 March.
What do the brokers say?
In the main, the brokers are a little negative on Woodside, with 1 buy recommendation, 2 neutral recommendations and 4 sell recommendations.
According to FN Arena, the consensus target price sits at $29.68, 3.8% above Friday’s closing price of $28.58 but 1.4% below the dividend adjusted theoretical ex-entitlement price of $30.11.
Broker Recommendations and Target Prices
In terms of the offer, many can’t understand why Woodside is raising so much capital. Credit Suisse is “astonished” that Woodside is raising capital, while Citi suggests that it could have been funded by cutting or underwriting dividends.
Most agree that the price Woodside is paying for Scarborough is reasonable, although Macquarie is a little more caustic, describing the asset as “a dry field that Exxon has owned since 1979 but couldn’t make economic”.
My view
Given that economic growth around the world is in sync and that the oil price looks to have found a bottom at US$50-US$55 per barrel, I think this is the time to be a little overweight energy stocks. For that that reason, I suggest that shareholders support the issue.
Further, the institutional offer was well supported with 90% of institutions taking up their shares and the shortfall clearing at a respectable $29.60. This reflects solid underlying demand.
Negatives include the market’s weaker trading in Woodside shares last week (which I put down to the inevitable indigestion after a big capital raise), and of course, Woodside’s track record in investing shareholders’ funds. The case for the acquisition of Scarborough is plausible but not compelling, and in regard to the capital raising, there are unanswered questions as to “why” and “why so big”.
This all said, I suggest you support this. If you don’t agree with my view on the energy sector or are already overweight, then pass.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.