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Date : 17/11/2022

Warrego Energy

ASX :

WGO

Market Cap : $262.97 Million

Hold

52 Week Range : $0.10 - $0.22

Share Price : $0.21

Many factors following the takeover deal have already been priced into WGO’s shares. Therefore, it will be most appropriate to wait for further development. We recommend our members “hold” for now.

Company Analysis

We have been covering Warrego Energy (ASX: WGO) since August last year, whilst this Company was not yet in the spotlight. We early recognised Warrego as an exploration and development gas Company with massive potential. Warrego was under the radar for almost a year until the takeover battle revealed the Company to the mainstream media. Warrego has an excellent platform for generating long-term revenue to underpin growth.

The Company owns interests in four projects, two in Australia and two in Spain. The most exciting Project is in the Perth Basin, where Warrego has a 50% interest in the West Erregulla EP-469 gas project, which has been certified 2C of 513 billion standard cubic feet of gas, suggesting a massive revenue opportunity ahead. This certification could mean that Warrego’s West Erregulla EP-469 gas project could rapidly generate revenue from its 2C reserve, which signifies the best estimate of contingent resources defined by the internationally recognised Petroleum Resources Management System. Thus, two Companies, Strike Energy (ASX: STX) and Beach Energy (ASX: BPT) are now interested in taking over this asset, and Warrego recently received two merger proposals.

Company Updates

Warrego’s takeover battle between Strike Energy and Beach Energy

Strike Energy’s initial merger proposal

Warrego recently made the headlines following Strike Energy’s all-scrip deal to take over the Company. On Thursday, November 10, Warrego and Strike revealed that they have been discussing a potential merger since September. Strike Energy initially offered to Warrego shareholders 0.7142 of its shares for each WGO share held. After the announcement, Warrego’s share prices broke their medium-term resistance range at 16 cents and 16.5 cents, which led to a massive inflow of volume and a breakout towards the 20 cents level.

Chart, histogram Description automatically generated

Source: Tradingview

Under the terms of the offer, Strike Energy is proposing Warrego sell its assets held in Spain to solely focus on the Company’s Western Australia Projects. The net proceeds from the sale will be then distributed to Warrego’s shareholders.

Following further discussions in October, Strike Energy reviewed its offer and proposed to Warrego to increase to 0.7521 STX shares per WGO share and finally come up to its final offer for 0.775 shares of Strike Energy per Warrego share. Moreover, attached to this deal, Strike offered Warrego the option to nominate one Director to the merged Company’s Board.

It is worth noting that Strike Energy currently owns half of the Joint Venture with Warrego for developing the West Erregulla EP-469 in Western Australia for the domestic gas market.

Not the first time Strike Energy is seeking to acquire Warrego

The recent merger proposal is not Strike’s first attempt. Strike Energy did send an unsolicited proposal to acquire all Warrego shares back around March 2020. The offer at that time was even above today’s offer for Strike at 1.2 STX shares for each WGO share. Warrego rejected the offer as the Company considered it undervalued as the deal would result in Warrego shareholders owning about one-third of the merged entity for the West Erregulla Project. In contrast, Strike and Warrego each hold a 50% interest in this Project.

Beach Energy comes into the picture

Following the latest offer from Strike Energy, Beach Energy comes with what Warrego believes to be a better proposition. Beach Energy’s offer would override Strike Energy’s merger proposal of 0.775 new STX shares for each WGO share held. However, under the terms, Beach will consider the offer if Warrego sells all its assets in Spain within twelve months. So far, Beach emerged as the winner of the two bidders, with a scheme implementation deed to acquire all of Warrego’s issued shares for 20 cents cash per share. In addition, any net proceeds received from the sale of Warrego’s Spanish assets through a scheme of arrangement.

Investment Thesis

Warrego takeover deal timeline:

  1. Strike Energy is offering Warrego’s shareholders 0.775 STX shares for each WGO share held
  2. Beach Energy comes up and offers Warrego’s shareholders 20 cents cash per share of WGO
  3. Warrego favour the Beach Energy deal, although it is still subject to approval by the court

1. Strike Energy merger proposal as of November 15, 2022

Many things happened in the last few days. And at the time of writing, Beach Energy came up with what Warrego believes to be a better deal than what Strike Energy has to offer.

On Tuesday, November 15, Strike recognised a competing proposal for the takeover of Warrego and that Warrego has entered into a Scheme Implementation Deed with Beach Energy.

However, Strike strongly believes its proposal represents a superior offer to Warrego shareholders. The Company stated that its merger proposal provides a higher value per share for Warrego shareholders. Strike offers to Warrego to retain ownership in the West Erregulla Project and join Strike Energy. The Company believe that this will benefit both parties. Strike highlighted that the merger will bring synergies and reinforce the business with a dominant portfolio of assets in the emerging Perth Basin.

Strike Energy also mentioned that its proposal will allow Warrego Director to join the merged entity’s Board and oversee Warrego’s sale of assets in Spain. Furthermore, Strike emphasises that this deal is a continuation of the existing Joint Venture Partnership between the two companies. The merger will create significant value and synergies, resulting in an integrated renewable energy business that could become a unique ASX-listed investment in sustainable energy and fertiliser manufacturing.

And finally, tax-wise, the Strike-Warrego merger allows Warrego shareholders to have the opportunity to claim “roll-over tax relief”.

Upon the successful merger, Strike Energy proposes consolidating 100% ownership across the Erregulla region. According to the Company, this would accelerate, maximise and optimise the gas production, improving the cashflows and access to capital.

Diagram Description automatically generated

Source: STX

More importantly, the result of the merger will allow Warrego’s shareholders to continue participating in the Project, as Strike is offering 0.775 new, fully paid STX ordinary shares for each WGO share held.

2. Warrego Board in favour of Beach Energy deal proposal

So far, Beach Energy has come out as the winner in the takeover battle, luring Warrego with a nearly $250 million offer. On Friday, November 11, Beach announced its intention to acquire all of WGO’s shares. The offer is still subject to Beach completing its confirmatory due diligence. Negotiation with Warrego on a binding implementation agreement has been completed, and the Company came up with the following proposition:

  • Beach intends to take over Warrego by offering to WGO’s shareholders 20 cents per share, all cash, which according to the Company, is a 36% premium to Warrego’s 1-month VWAP on the 9th of November, 2022.
  • The deal requires Warrego to sell its Spanish assets within twelve months, and a contingent value payment, net of costs and taxes, may be payable to Warrego shareholders.
  • Beach expects the deal to be completed by the 8th of March, 2023.

Warrego board in favour of the deal

Warrego’s Board has unanimously recommended that its shareholders vote in favour of Beach’s proposition. However, Warrego mentioned that the Company remains open to superior proposals and that the deal between the two parties is still subject to an independent expert’s confirmation that it is in the best interests of Warrego shareholders. Warrego considers the deal an attractive outcome for its shareholders as the Company underlines the certainty of cash proceeds. Furthermore, Warrego is also very optimistic about the potential sale of its Assets in Spain, which the Company believe has a compelling value. The scheme is now subject to approval by Warrego shareholders, the court, and other customary conditions.

If the deal goes through, Warrego shareholders will receive cash equivalent to WGO’s 20 cents per share and any cash proceeds from selling the Spanish assets. Basically, for Warrego’s investors, this will represent an exit, and shareholders will not participate anymore in the future of the development of the West Erregula gas Project.

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Source: BPT

3. Warrego-Beach Energy deal subject to approval

For Beach Energy’s proposal to succeed, it will need an independent expert panel to determine if the offer is in the best interests of Warrego’s shareholders. At the time of writing, WGO’s shares are traded at 21 cents and have remained about 3% to almost 10% above Beach Energy’s offer price of 20 cents. We think the approval of Beach Energy’s deal will be challenging. Moreover, Strike Energy is well-positioned on the Warrego register with about 8% of votable shares already. Adding to this, Strike also has shareholders who own as well approximately 15% of WGO’s votable shares. This already brings 23% of votes in favour of Strike Energy. In May, Warrego’s third-largest shareholder, Regal Partners (ASX: RPL), topped up an additional 3.19 million WGO shares bringing the total number of shares held to 97.37 million. As such, it is unlikely that Regal Partners, which has about 9% of WGO votable shares choose to go with Beach Energy’s deal. Warrego’s founders and associates only have approximately 26% of the votable shares. Given that the Australian registered holders have about 35% of votable shares, they will be the voters that will likely determine the outcome of this deal.

Source: STX, Shares In Value

Recommendation

Three scenarios emerge from the recent takeover deal:

  1. Strike Energy’s merger deal will initially benefit Warrego’s shareholders with a limited 3% premium on the current WGO’s share price. Strike offers 0.775 of its shares for each Warrego share held. Therefore, this will allow Warrego’s shareholders to join Strike and still remain exposed to the future development of the West Erregula gas Project.
  2. The second scenario is Beach Energy receiving approval for the takeover deal, which the Company is offering to Warrego’s shareholders 20 cents, all-cash, and the cash proceeds from the potential sale of Warrego’s Spanish assets. This will mean Warrego’s shareholders will “exit” the Project as it is taken over by Beach Energy.
  3. And finally, if the Beach Energy deal is not getting approved by Warrego’s shareholders and the court, Warrego could consider renegotiating with Strike Energy for another round of bids.

Regardless of the outcome of this deal, we believe many factors have already been priced into WGO’s shares. Therefore, it will be most appropriate to wait for further development. We recommend our members “Hold” for now.

 

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