2011-07-19-2011-07-15

To buy company with more than 1 million net acres in Texas and Louisiana targeting the Eagle Ford, Haynesville & Permian Basin plays, gaining 950 MMcfe/d, 3.4 Tcfe proved.

Expanding its footprint in U.S. shales, Australian conglomerate BHP Billiton (NYSE: BHP) plans to acquire Petrohawk Energy Corp., Houston (NYSE: HK), which holds positions in the Eagle Ford and Haynesville shale resource plays as well as the Permian Basin. The purchase price is $15.1 billion in cash and debt assumption.

"The proposed acquisition of Petrohawk is consistent with our well-defined, upstream, tier-1 strategy and provides us with even greater exposure to the world's largest energy market, while also broadening our geographic and customer spread," says BHP Billiton chief executive Marius Kloppers. "Importantly, our offer and the associated substantial premium represent a unique opportunity for Petrohawk shareholders and recognizes the growth opportunities embedded in its portfolio immediately."

BHP Billiton will pay US$38.75 per Petrohawk share, representing a total equity value of approximately US$12.1 billion and a 65% premium to the closing price before the announcement. It will assume approximately $3 billion of Petrohawk debt.

"We believe these premium oil and natural gas assets would benefit significantly by residing within a larger entity that can employ more capital intensity to accelerate their realized value," says Petrohawk chief executive Floyd Wilson. "We are excited to see this transaction completed and to be part of the BHP Billiton organization."

Petrohawk is the fourth company Wilson has started and sold.

Petrohawk's assets cover approximately 1 million net acres in Texas and Louisiana. The company estimates 2011 net production of approximately 950 million cubic feet equivalent per day, or 158,000 barrels of oil equivalent per day. Year-end 2010 proved reserves were 3.4 trillion cubic feet of gas equivalent. The company has reported a nonproved resources base of 32 Tcfe for a total risked resource base of 35 Tcfe.

In the Haynesville shale, Petrohawk holds 225,000 net acres with 2.3 Tcf of proved reserves and 12.7 Tcf risked resource potential. In the same area and overlapping, it holds 120,000 in the Lower Bossier shale with 13 Bcf proved and 6.5 Tcf risked resource potential.

In the Eagle Ford shale, the company has 332,000 acres in three regions with 457 Bcf gas, 19 million barrels condensate and 27 million barrels natural gas liquids proved. Risked resource potential there includes 7.36 Tcf.

Petrohawk recently acquired 325,000 net acres in the Midland and Delaware basins of the Texas Permian Basin in the Wolfcamp shale, Bone Spring sands and Avalon shale plays.

Petrohawk reported gross assets of US$8.2 billion at the end of the first quarter, and US$390 million of profit before tax year-end 2010. Production for Petrohawk's first quarter averaged 826 MMcfe per day, above management's guidance of 770 MMcfe per day. Production represented a sequential increase of 8.4% and year-over-year growth of 32%.

BHP Billiton Petroleum chief executive J. Michael Yeager says the Petrohawk acquisition would add high-quality growth to the company. "Petrohawk has a focused portfolio of three world class onshore natural gas and liquids-rich shale assets. With over a decade of significant investment and volume growth ahead, this transaction would build on our recent acquisition of the Fayetteville shale in Arkansas and provides the potential to more than double our existing resource base."

Earlier this year, BHP acquired 487,000 acres in the Fayetteville shale from Chesapeake Energy Corp., Oklahoma City, Okla., (NYSE: CHK) for $4.7 billion marking its entry onshore U.S. Yeager says BHP plans to retain Petrohawk's 700 employees.

Barclays Capital and Scotia Waterous are financial advisors to BHP Billiton. Sullivan & Cromwell LLP and Morgan, Lewis & Bockius LLP are legal advisors. Barclays Capital will act as dealer manager. Goldman Sachs is financial advisor for Petrohawk. Simpson Thacher & Bartlett LLP is legal advisor.

Closing is expected in the third quarter.

Raymond James analyst Andrew Coleman places the metrics at $4.40 per Mcfe on year-end proved reserves of 3.4 Tcfe, $0.36 per Mcfe giving credit to its 32.8 Tcfe of 3P reserves, and $16,000 per flowing Mcfe per day. He estimates an implied EV/EBITDA of 7.5x, compared with 5x prior to announcement. "The high premium for the deal makes us wonder how competitive the bid was," he said.

According to KeyBanc Capital Markets analyst Jack Aydin, based on the $15.1-billion transaction value, Petrohawk received $4.45 per proved Mcfe vs. its peer group currently trading at $2.50 per proved Mcfe. It received $15,895 per Mcfe per day based on estimated 2011 production of 950 MMcfe per day vs. peers trading at $12,073 per Mcfe per day.

"Moreover, the transaction is a 139% premium to our 'hard' NAV estimate of $16.23 per share and a 17.6% discount to our RNAV estimate of $47 per share. Based on the company's approximately 1 million net acres, Petrohawk received $15,100 per net acre. We think Petrohawk received a very good deal," Aydin said.

Analysts at Tudor, Pickering, Holt & Co. say the company is a perfect fit for BHP, which wants "to get bigger faster, and learn from one of the best shale teams in the world." TPH considers Petrohawk's recent stock underperformance as "not enough cash vs. asset size."

"Although the timing was never certain, Petrohawk's acquisition is no surprise;" says Global Hunter Securities analyst Michael Bodino. "Since inception, Petrhawk was built to sell, and this was always going to be the exit, in our view."