Australia’s BHP Billiton Ltd. has offered to buy shale patch pioneer Petrohawk Energy Corp. for $12.1 billion in a deal that would more than double unit BHP Billiton Petroleum’s resource base and grow proved reserves by about 30%, it said. Petrohawk shares took flight on the news as investors also delivered uplift to a flock of the company’s peers.

Combined with an earlier multi-billion-dollar deal, BHP Billiton this year has spent nearly $17 billion on U.S. shales, which it said “are entering a new stage of the development cycle.” Earlier this year BHP Billiton made a major grab in the Fayetteville Shale, paying $4.75 billion to Chesapeake Energy Corp. for nearly half a billion acres (see Daily GPI, Feb. 23).

“In a single year BHP Billiton Petroleum’s resource base will grow by more than 300% to 11 billion boe,” the company said Friday. “BHP Billiton Petroleum becomes one of the 10 largest independent upstream oil and gas companies in the world based on total reserves.”

By its own estimate, BHP Billiton Petroleum would rank at No. 7 among independents, up from No. 21, thanks to Petrohawk.

The Petrohawk deal would give it operated positions in three “world class” resource plays: the Eagle Ford Shale in South Texas, the Haynesville shales in North Louisiana and East Texas and the Permian Basin in West Texas.

“Petrohawk has a focused portfolio of three world-class onshore natural gas and liquids rich shale assets,” said BHP Billiton Petroleum CEO J. Michael Yeager. “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.

“Following completion of the Petrohawk transaction, BHP Billiton Petroleum will be on track to deliver a compound annual production growth rate of more than 10% for the remainder of the decade as we accelerate our shale development program and leverage our strategic capability in the deepwater.”

Shales compare favorably with — and complement — the company’s offshore opportunities on several fronts, it said. Shale plays don’t come with geologic risk, and time to first production — and payback — can be measured in months rather than years. In the shales, flexibility is “significant” and expandability is “substantial,” compared with the offshore where both are seen by BHP Billiton as “limited.”

While most of the upstream industry’s attention has been focused on liquids-rich assets, BHP Billiton management said “natural gas is the preferred fuel in a low-carbon world” for which “demand continues to grow, led by the power sector.” Additionally, the “liquids-rich Permian Basin is highly prospective.”

Petrohawk assets cover about one million net acres in Texas and Louisiana, with estimated 2011 net production of 950 MMcfe/d, or 158,000 boe/d. The company was ranked No. 15 among U.S. gas producers in 2010 with 234.5 Bcf, according to an NGI survey.

At year-end 2010, Petrohawk reported proved reserves of 3.4 Tcfe. The company has a current nonproved resources base of 32 Tcfe for a total risked resource base of 35 Tcfe. Petrohawk reported gross assets of $8.2 billion as of March 31 and $390 million of profit before tax for 2010.

Analyst Dan McSpirit of BMO Capital Markets noted that Petrohawk has had a “for sale” sign out for years. Petrohawk’s “aggressive lease capture model appears to have paid off. That’s a good thing. Cheers,” he said in a note Friday. “The deal should be viewed in the context of circumstances specific to [Petrohawk], rather than used to conclude that an arms race over domestic natural gas resources at the corporate level is under way…”

However, consolidation has been afoot. For instance, late last year ExxonMobil Corp.’s XTO Energy Inc. paid $575 million for Petrohawk assets in the Fayetteville, making the major the No. 2 leaseholder in the Arkansas play (see Daily GPI, Dec. 27, 2010). Not long before, ExxonMobil had bought XTO (see Daily GPI, June 28, 2010).

During a conference call with financial analysts, BHP Billiton CEO Marius Kloppers described how he sees the U.S. shale gas industry as having matured and that consolidation is “a logical progression.” While it was pioneered by entrepreneurial companies, such as Petrohawk, that discovered and unlocked the plays, the transition to a long-term manufacturing operation requires capital capabilities beyond those of the early entrants, Kloppers said. “Financial capacity has become the new challenge.”

Petrohawk CEO Floyd Wilson concurred. “I have felt and known for some time that our great assets deserved to be housed within a larger entity,” he said. In an early 2009 regulatory filing Petrohawk noted an ongoing consolidation in the E&P industry. “Our business strategy embraces this trend,” the company said. “We seek to assemble and maintain within our core operating areas a high-quality, lower cost portfolio of operated properties with attractive production, reserve and development profiles that may be desirable to industry participants.”

Given the environment, some Petrohawk peers could be in play, an analyst told NGI. For instance, shares of Southwestern Energy Co., Range Resources Corp. and EQT Corp. had posted gains of 5-12% at the close of trading Friday while the Amex Natural Gas Index closed up 3.61%.

Musing on which company might be next, analysts at Tudor, Pickering, Holt & Co. (TPH) wrote that “we think there needs to be a combination of a willing seller, right market cap, and/or right assets.” They also noted Range and Southwestern as potential takeout candidates as well as Brigham Exploration Co. (up 8.43% Friday), Oasis Petroleum Inc. (up 7.63%), Cabot Oil & Gas Corp. (up 9.31%) and Carrizo Oil & Gas Inc. (up 3.74%).

Petrohawk shares closed up 62.49% at $38.17 Friday after touching a new 52-week high of $38.37 on volume that was 45 times the norm on the New York Stock Exchange (NYSE). BHP Billiton shares ended the day down 1.3% at $91.08 in somewhat light trading on the NYSE.

TPH has been a Petrohawk fan for a while. “We’ve never questioned [Petrohawk’s] asset quality with blocky, core shale assets in the Eagle Ford, Haynesville, and emerging Permian basin,” TPH analysts said in a note. “The company is a perfect fit for BHP that wants to get bigger faster and learn from one of the best shale teams in the world. [Petrohawk] stock’s problem was not enough cash versus asset size…[Chesapeake, EOG Resources Inc., Range, Sandridge Energy Inc.] all fall somewhat into the same bucket.”

BHP Billiton’s offer is $38.75/share cash, giving the deal an enterprise value of $15.1 billion including debt assumption. The transaction is to be financed with cash on hand and a new credit facility, which “will not compromise our solid ‘A’ credit rating.” The offer is a 49.5% premium to Petrohawk’s June 1 closing price, BHP Billiton said, and a more than 60% premium to the stock’s Thursday close.

“Based on our assessment, the value composition of [Petrohawk] at the takeout price is roughly 60% Eagle Ford Shale and approximately 40% Haynesville Shale (minor value ascribed to Permian),” wrote analysts at Canaccord Genuity Energy Research. They said the offer is nearly eight times estimated 2012 earnings before interest, taxes, depreciation and amortization (EBITDA), which compares favorably with the exploration and production sector’s current valuation of almost six times 2012 EBITDA.

“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,” said Kloppers. “Importantly, our offer and the associated substantial premium represent a unique opportunity for Petrohawk shareholders and recognize the growth opportunities embedded in its portfolio immediately.”

Yeager said BHP Billiton would keep Houston-based Petrohawk’s U.S.-based roughly 650-member workforce, “which has been at the forefront of the technological innovation that brought about the economic viability of U.S. shales.”

Petrohawk employees would be joining BHP Billiton’s deeper pockets, said Wilson. “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,” he said.

Assuming a majority of outstanding Petrohawk shares are tendered, the deal is expected to close during the third quarter, the companies said.

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