Weekly Update: BHP Billiton swoops on PetroHawk Energy in $15.1 billion acquisition

Eoin Coyne 
Evaluate Energy

BHP Billiton made their second major move into the US shale sector this week, with a $15.1 billion acquisition including debt of Petrohawk Energy. The move for the gas-weighted company will add major shale assets in the Eagle Ford and Haynesville plays along with conventional resources in the Permian basin. BHP Billiton’s US portfolio already included a large holding in the Fayetteville shale play which they acquired from Chesapeake in a $4.75 billion deal in February.

With a consideration of $38.75 per share representing a 62% premium on the 1-day prior share price of PetroHawk and an annualised EBITDA multiple of 19x, the price appears high. After accounting for the estimated value of unbooked risked reserves, the acquisition calculates as $3.09 per proved mcfe, over double the normalised cost per mcfe of BHP’s previous acquisition in the Fayetteville and only $1.33 below the current Henry Hub benchmark price of gas in the US. If the unbooked reserves followed the same gas weighting as the current reserves of over 90%, the deal would make little economic sense. Crucially however there will be a significant exposure to shale oil resources from PetroHawk’s 332,000 acres in the Eagle Ford and the far superior realizations that oil has enjoyed over gas in the US for the previous 3 years.

Williams Companies added to the long running saga this week of who will gain control of Southern Union Company by increasing their offer to $44 per share. Although the offer is 10% higher than the $40 per share that Energy Transfer Equity’s offered last week, the board of Southern Union are still currently recommending the lower cash and stock offer from Energy Transfer Equity. The door has been left open for Williams with Southern Union releasing a statement declaring that to not enter into further discussion with Williams “would be reasonably likely to constitute a breach by the Board of its fiduciary duties”. Regardless of whether the final vote goes to Williams or Energy Transfer Equity the real winner in this tug of war is likely to be the shareholders of Southern Union. At a time when world stock markets are being dragged down on the back of economic growth fears and the European debt crisis, the stock price of Southern Union has appreciated by over 50% since the first takeover offer was lodged on the 16th of June.

For ConocoPhillips (NYSE:COP) it was the announcement of an intended split of their refining and upstream assets into two separate companies that grabbed the headlines, but earlier in the week ConocoPhillips also announced a $110 million acquisition of Australian shale assets from New Standard Energy. The asset in question is the Goldwyer project and ConocoPhillips will gain a 75% interest in exchange for funding the drilling, coring and evaluation of multiple wells. For the target company New Standard Energy, gaining a well-funded company experienced already in shale development, led to their share price rising by over 40% since the deal announcement. Australia’s shale industry is still in its infancy but momentum has been steadily building with early estimates of 400 TCF of shale gas resources being present across several basins in the country. The move also coincides with Beach Energy reporting Australia’s first successful shale gas flow test in the Cooper Basin this week.

In the Niobrara shale play in the US, Bill Barrett added to its existing holdings with a $150 million acquisition from Texas American Resources. Only a small portion of the assets are already in production and the acquisition will add a further $35 million this year alone to Bill Barrett’s capital expenditure budget. Due to the early stage that the assets are in, the normalized acquisition cost equated to a competitive $15.64 per boe of proved reserves for the oil-weighted assets.

Douglas Miller, Exco Resources’ CEO, failed this week with his bid to take the company private. Following the original offer of $20.50 per share, a special committee was formed to assess if the deal was in the best interests of the current shareholders. However after a “key player” pulled out of the deal, Miller was forced to reduce his offer by almost 10% to $18.50 and the committee reached the agreement to terminate the process. A deal that was successful in part this week despite many hurdles along the way was Vedanta’s protracted acquisition of a 40% stake in Cairn India from Cairn Energy. The closure involved just 10% of Cairn India in exchange for $1.36 billion with the remaining 30% still subject to approvals from the Indian government.

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