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$12 Billion Shale Gas Deal for BHP Billiton

Posted on the 26 August 2011 by Kevinlaw

BHP Billiton has made another big bet on energy in the US, announcing an agreement to buy Petrohawk, an independent oil and gas company, for $12.1bn in cash.

In its biggest acquisition to date, the Anglo-Australian mining group said on Thursday it had agreed to pay $38.75 a share for Petrohawk, which operates in three leading areas of shale gas and oil production in the US. The deal values Petrohawk at $15.1bn including net debt.

Marius Kloppers, BHP chief executive, said the acquisition would be earnings accretive in its first full year of consolidation as he defended the 65 per cent premium the miner had agreed pay for Houston-based Petrohawk shares compared to their Thursday closing level.

“Petrohawk is attractive to us because it is in the large, liquid North American market where you can sell the gas,” Mr Kloppers said. “When making an acquisition, particularly one like this, the majority of the value is paid for the resources in the ground.”

BHP boosted its energy business in February with a deal to buy Chesapeake Energy’s Arkansas-based gas business for $4.75bn – its first acquisition since last year’s failed $39bn attempt to buy PotashCorp of Canada. That deal represented the group’s first venture into US shale, giving the company 87,000 acres of leasehold gas properties.

Exxon Mobil, Chevron, BP, Total and Statoil have also bought US shale assets in recent years. The sector has boomed because the gas is considered a better alternative to coal for power generation due to its lower carbon dioxide emissions

The gas, trapped thousands of feet underground, is released by opening up the shale rock with a process known as hydraulic fracturing, or “fracking”, in which thousands of tonnes of water, sand and other additives are pumped underground under high pressure.

BHP said on Thursday that the Petrohawk deal would more than double its petroleum division’s resource base and increase proved reserves by 30 per cent.

With the acquisitions of Chesapeake and Petrohawk, the company will have more than tripled its resource base from 3.7bn barrels of oil equivalent to 11bn boe within the last year.

It forecast its energy business would expand to a 1m boe per day business within five years, compared to less than 500,000 boe per day in the 2010-11 financial year.

Petrohawk had been undervalued relative to peers, people familiar with the deal said, as the company faced capital constraints in developing its large portfolio of assets. The price on offer from BHP reflects about 7.5 times forecast earnings before interest, tax, depreciation and amortisation in 2012, in line with where other companies in the sector trade, they added.

Petrohawk, in contrast, has recently traded closer to 4.5 to 5 times forecast ebitda.

Petrohawk operates in the Eagle Ford and Haynesville shales in Texas and Louisiana as well as owning substantial acreage in the Permian Basin, an oil-rich shale in Texas.

Its assets cover about 1m acres and are expected to produce about 158,000 boe per day in 2011. At the end of last year the company, which was founded by energy entrepreneur Floyd Wilson in 2003, reported proved reserves of 3,400bn cubic feet of natural gas equivalent.

Barclays Capital and Scotia Waterous advised BHP on the deal. Goldman Sachs advised Petrohawk.

The offer will be financed from BHP’s cash balances and a new credit facility.

Just as BHP bought Athabasca Potash in Saskatchewan, Canada for under $1bn a few months before launching a $39bn bid for PotashCorp, its acquisition of the Fayetteville shale gas assets this year was a precursor to a much larger play in an alternative commodity class.

Like potash, the market for shale gas follows different economic cycles to iron ore, copper, and coal, BHP’s principal commodities. BHP’s strategy is to buffer itself against the price volatility inherent in all commodities by positioning itself in top-tier assets across the commodities spectrum.

The Petrohawk deal comes as investors scrutinise the company’s use of cash. BHP last month completed a $10bn share buy-back programme and is pumping money in to the expansion of its iron ore mining complex in Australia.

But the highly cash generative company, which analysts believe could slip into a net cash position this month, has failed to deploy capital on large-scale mergers and acquisitions in the past year.

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