BHP Billiton to acquire Petrohawk for $12.1 bn

BHP Billiton Ltd, the world’s largest mining company, agreed to buy Petrohawk Energy Corp for about $12.1 billion in cash in its biggest acquisition, betting natural gas demand will gain in the US.

BHP will pay $38.75 a share using cash and debt, the companies said in a statement today. That’s 61 per cent more than Houston-based Petrohawk’s average price over the past 20 trading days and compares with the 25 per cent average premium in 17 deals worth at least $5 billion for oil and gas producers in the past five years, according to data compiled by Bloomberg.

The deal marks Chief Executive Officer Marius Kloppers’s second foray in shale gas, forecast to make up half of US gas output by 2030, after the $4.75 billion purchase of Chesapeake Energy Corp assets in March. Melbourne-based BHP sees total spending on developing Petrohawk assets of as much as $65 billion by 2020, Morgan Stanley analysts said in a note today.

 

“BHP wants to increase the scale of its oil and gas business given that most of its existing energy assets are mature,” said Jason Teh, who helps manage about $3 billion, including BHP stock, at Investors Mutual Ltd in Sydney. “This acquisition nearly doubles BHP’s resource base.”

BHP fell as much as 2.5 per cent to 2,326 pence and traded at 2,351.3 pence by 10.36 am in London. It fell 1.6 per cent to close at A$42.89 in Sydney trading, the lowest level since June 28. Petrohawk slid 1.8 per cent to $23.49 in New York yesterday.

BIGGER PREMIUM
The premium is “probably a little bit more than expected,” Cameron Peacock, a market analyst at IG Markets Ltd in Melbourne, said by phone. Paying in advance for future growth “is something the analysts often don’t like to see,” he said.

The cost of protecting BHP’s debt against default rose three basis points to 80.5 basis points as of 2.28 pm in Sydney, according to Deutsche Bank AG. Standard & Poor’s Ratings Services said it’s A+ credit rating on BHP remains unchanged because the company’s cash flow can support the acquisition. The takeover also includes $3 billion in Petrohawk debt, BHP said.

The deal adds three fields across about one million net acres in Texas and Louisiana and takes BHP into the top 10 of oil and gas companies. The offer values Petrohawk CEO Floyd C Wilson’s 0.99 per cent stake in the company at about $117 million.

REJECTED DEALS
Kloppers has had three deals totaling more than $100 billion aborted or rejected in the past four years, including hostile bids for Rio Tinto Group and Potash Corp of Saskatchewan Inc. BHP is committed “to be in every aisle of the energy supermarket,” he said today on a conference call.

“There has been growing pressure on Marius Kloppers, or a feeling among the board at least anyhow, that they have to do some sort of deal,” Gavin Wendt, director at Sydney-based Mine Life Pty Ltd, said by telephone. “They’ve spent a significant amount of time, money and energy coming up with nothing.”

Still, “shareholders may well have some concerns, considering BHP is planning on spending a total of about $20 billion on an entirely new business that they don’t know that much about,” he said.

Formed in 2003, Petrohawk expanded by acquiring companies including Missions Resources Corp in 2005 and KCS Energy Inc in 2006 before “aggressively” buying shale acreages in 2007, the developer’s website shows. It has about 650 employees.

ACREAGE TRIPLED
Petrohawk held 3.4 trillion cubic feet of reserves at the end of 2010. It produced 825 million cubic feet of gas as of March this year, of which 10 per cent was in the form of liquids such as oil. The company expects to produce 950 million cubic feet of gas a day this year, with liquids accounting for 15 per cent of output, according to its website.

The Chesapeake purchase gave BHP 487,000 net acres of properties in central Arkansas with 2.4 trillion cubic feet of proven reserves. Petrohawk’s million acres triple BHP’s acreage in US oil and gas fields.

BHP will become the seventh-largest independent upstream oil and gas company based on total resources, BHP said in an investor presentation, citing Wood MacKenzie Consultants Ltd. The US gas market is the world’s largest, BHP said.

“Petrohawk are extremely well regarded as innovative but aggressive operators,” Prasad Patkar, who helps manage the equivalent of $1.7 billion, including BHP shares, at Sydney-based Platypus Asset Management Ltd said by phone. “You might find that they have made a very smart acquisition.”

RECORD DEAL
The proposed deal would be the biggest all-cash takeover by any Australian company, according to Bloomberg data. BHP is being advised by Barclays Capital and Scotia Waterous. Barclays Capital will act as dealer manager for the offer, the statement said. Goldman Sachs Group Inc is advising Petrohawk.

BHP is paying 18.4 times earnings before interest, tax, depreciation and amortisation, versus a median of 13.5 times for seven purchases by producers over the past five years, the data show. It’s paying $2.54 a barrel of oil equivalent for Petrohawk, compared with $2.79 a barrel for the Chesapeake assets, Morgan Stanley Melbourne-based analyst Cameron Judd said today in a note to clients.

“BHP has valued this asset for growth,” Deutsche Bank AG analysts Grant Sporre, Rob Clifford and Gaetan De Buyer, said in an e-mailed note. “BHP is increasingly confident on the future of gas and shale in particular as they continue their broadened push into the shale gas sector.”

BHP DEBT
The company, which forecasts the acquisition will boost earnings in its first full year, is looking at raising about $7.5 billion in debt to help finance the acquisition, Kloppers said on a conference call. BHP expects to have net cash of $7.4 billion in fiscal 2012, according to a May report by Royal Bank of Scotland Group Plc.

BHP, which this year committed to spend $80 billion on mines and oilfields by 2015, joins Exxon Mobil Corp and Chevron Corp in ramping up acquisitions in gas prospects previously considered too costly and difficult to exploit. Shale-rock formations require injection of water, sand and chemicals to release gas. Environmental groups have opposed using the process called hydraulic fracturing, or fracking.

Transactions for shale gas properties in the Eagle Ford area of Texas, where some of the Petrohawk assets are located, accounted for 20 per cent of energy deals in the second-quarter, according to data compiled by Bloomberg. The purchase would be the largest acquisition of a US exploration and production company since Exxon bought XTO Energy Inc for $34.9 billion in 2009, according to Bloomberg data.

Mergers and acquisitions in the industry will continue as “various majors and others consolidate their positions to get scale, synergy, and so on,” Kloppers said on the call. “It’s very highly likely that you’re going to continue to see us participate in that as well.”