The Rising Influence of Rising Affluence

[DewDiligence]

BHP Acquires HK for $38.75/sh in Cash

[The $12B buyout has a whopping 65% premium to HK’s closing price on Thursday, so evidently there was no leak. BHP, the world’s largest mining company, derives about 15% of its revenue and 20% of its operating income from oil & gas, producing about 500Kboe/d (see map in #msg-57075289). Added to HK’s production of 160Kboe/d, BHP will become as large an upstream-oil-and-gas player as APC.

BHP has made no secret of its longstanding desire to get bigger in hydrocarbons—see, for instance #msg-60147234 and #msg-50642937. When the megadeal for Potash fell through in Nov 2010 (#msg-56687568), M&A in oil & gas became a fait accompli, resulting in a $5B deal for CHK’s shale assets in Feb 2011 (#msg-60162987) and now a $12B deal for HK.]

http://online.wsj.com/article/SB10001424052702304203304576446511143159474.html

›JULY 15, 2011
By GINA CHON, DANIEL GILBERT and ROBB STEWART

BHP Billiton Ltd. said Thursday it plans to acquire Petrohawk Energy Corp. for more than $12 billion in cash, giving the Anglo-Australian mining company access to large shale assets in Texas and Louisiana in one of the largest deals of the year.

BHP will pay $38.75 per share, a 65% premium to Petrohawk's closing price on Thursday of $23.49 a share.

The deal marks an important strategic step for BHP, which last year was rebuffed in a highly politicized $38.6 billion bid for Canada's Potash Corp. of Saskatchewan Inc.

One of the largest global mining companies, BHP has been eager to spend its war chest to diversify from minerals and mining into oil and gas. The Petrohawk deal will double BHP's resource base in oil and gas, allowing the company to increase its production by about 10% for the rest of the decade [I think they meant to say 10% *per year* for the rest of the decade], the company said.

Petrohawk Chief Executive Floyd Wilson said the Houston-based company's assets could be better leveraged in a bigger company with the capital to invest over decades. Petrohawk is "well funded, but we have a much more limited budget than a company like BHP," he said.

Analysts praised the pairing. "Petrohawk had the assets, but not the financing," said David Heikkinen, an analyst at Tudor Pickering Holt. "BHP had the financing, but not the assets. This solves both problems."

The transaction reflects the intensifying interest in shale, a rock formation dense with oil and gas. In recent years, energy companies have found a way economically to extract hydrocarbons from shale by injecting a high-pressure stream of water, sand and chemicals into the rock strata.

The technique, known as hydraulic fracturing, has drawn criticisms for potential environmental and safety concerns. But the energy industry sees it as a crucial procedure in unlocking reserves that could reduce U.S. dependence on foreign natural resource imports, and says environmental concerns are overblown.

Shale gas assets have emerged as popular acquisition targets for oil and other companies. Royal Dutch Shell PLC last year said it would pay US$4.7 billion to buy most of the shale gas assets of East Resources and Exxon Mobil Corp. in 2009 paid $31 billion for XTO Energy, the largest natural gas producer in the U.S.

Unlocking natural gas from shale has glutted the U.S. market and kept prices low. BHP's investment is a bet that gas prices will rise as power generators switch from coal to the cleaner burning fuel and U.S. gas can be exported and linked to the world market, where the commodity is more valuable.

Petrohawk's assets cover about one million acres in Texas and Louisiana and give BHP top positions in three of the most productive oil and gas fields in the U.S.: the Permian Basin in west Texas, the Eagle Ford Shale in south Texas and Louisiana's Haynesville Shale.

BHP is the third largest oil and gas producer in the U.S. Gulf of Mexico. But it had little experience onshore in the U.S. when earlier this year it made the biggest shale asset deal, paying $4.75 billion for Chesapeake Energy Corp.'s Fayetteville Shale acreage in Arkansas.

In addition to the assets of Petrohawk, BHP is buying technical know-how [as was the case in XOM’s acquisition of XTO]. The deal gives BHP engineers and geologists who are familiar with extracting oil and gas from shale, particularly the Fayetteville Shale, where Petrohawk was a pioneer and sold its holdings to Exxon Mobil Corp. in December.

BHP Billiton plans to retain Petrohawk's U.S. based work force, said Michael Yeager, chief executive of BHP's petroleum division.

Although the deal represents a large premium for Petrohawk shares, people familiar with the matter said Petrohawk's stock was undervalued in part because of the debt it took on to finance its large capital expenses; Petrohawk has been seen by industry observers as an attractive acquisition target for years.

At the same time, the hefty cash premium helps BHP stave off potential shareholder opposition or competing bids, boosting its odds that it will avoid the kind of protracted fight that ultimately ended in a failed bid for Potash.

BHP chief executive Marius Kloppers said the Petrohawk deal "provides us with even greater exposure to the world's largest energy market, while also broadening our geographic and customer spread."

Aside from its Potash bid, BHP had been on the hunt for oil and gas assets in the U.S. for some time and was looking to do a deal between $10 billion and $15 billion, people familiar with the matter said. BHP is still open to more deals and is interested in large mining assets, but valuations in that sector are currently high, people familiar with the matter said.

Barclays Capital and Scotia Waterous, and law firms Sullivan & Cromwell LLP and Morgan, Lewis & Bockius LLP advised BHP. Goldman Sachs Group Inc. and law firm Simpson Thacher & Bartlett LLP advised Petrohawk.‹