After its $US39 billion bid for Canada’s Potash Corp was blocked last year, BHP Billiton, having already seen the failure of its proposed iron ore production joint venture with Rio Tinto stymied by regulators, came to the conclusion that the only segment of the resources sector in which it could pursue a large-scale acquisition strategy without running into political roadblocks was energy.
Having run a slide rule over all the major independent oil and gas groups, including Woodside Petroleum, however, it came to a secondary conclusion. With the oil price soaring, buying a conventional oil or gas group that met its criteria of only adding large, long-life, low-cost tier one assets meant paying massive premia at the top of a price cycle.
That reasoning led it to the surprise $US4.75 billion acquisition of Chesapeake Energy’s shale gas assets in the Fayetteville region of Arkansas in the US in February, its first big sortie into unconventional energy.
Despite the escalating environmental concerns and controversies around unconventional gas — shale gas in the US and coal seam methane in Australia — BHP likes the potential of the sector to the point where today it announced the $US12.1 billion acquisition of Petrohawk Energy. With Petrohawk’s debt, the enterprise value of the deal is $US15.1 billion.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Petrohawk is a major independent onshore shale oil and gas producer, with close to a million cubic feet a day of production from its fields in Texas and Louisiana. It earned $US390 million last year.
The significance of the acquisition to BHP is that, where the Fayetteville deal increased BHP’s net reserves and resources by 45%, the addition of the Petrohawk resources more than doubles the resource base.
As BHP said, in the space of a year BHP’s petroleum business would have more than trebled its resource base to 11 billion barrels of oil equivalent. It now expects to increase its oil and gas production by 10% per year for the next decade.
The shale sector in the US is still in an early stage of development, although there is a dramatic increase in production occurring — and an equally dramatic consolidation as the major companies rush into the sector — that is transforming the US energy equation to the point where it may well become not just self-sufficient, but a net exporter of LNG. BHP referred today to projections that shale gas will account for about 50% of US production by 2030.
Despite the environmental risks created by the “fracking” process used to release the gas — the injections of chemicals under pressure — the appeal to the majors of unconventional gas is that it is relatively cheap to acquire but requires significant and continuing capital commitments to develop.
The smaller players who developed the sector have discovered that the more successful they are the more cash they need to pour into their projects to maintain their growth. Petrohawk has been forced to make more than 10 asset sales and raise more than $US3 billion of equity, and take on $US3 billion of debt, to fund the development of its core acreage.
A company such as BHP, with its vast balance sheet and cash flows, is able to accelerate development. It plans to spend more than $US5 billion a year over the next decade and beyond to increase production, something a Petrohawk could never contemplate.
Unlike oil, where the price is high, gas prices in the US reflect the recessed state of its economy, which also means that rather than capitalising top-of-cycle prices BHP is, it presumably hopes, entering at the bottom of a cycle.
Assuming it can manage the environmental and operational risks, the acquisition would vault BHP from outside the top 20 independent upstream oil and gas groups into the top 10.
Given that it has been pouring capital into expanding its iron ore and coal production, the step-change in the size of its oil and gas interests would also help rebalance its diversified portfolio of resource assets and strengthen the diversification of its cash flows, which has been a guiding principle since the group was remade under Paul Anderson and Chip Goodyear in the late 1990s.
It speaks volumes for the size and resilience of BHP’s cash flows and balance sheet that it can fund a $US15 billion acquisition from its existing cash reserves, and a credit facility that will still leave the group with minimal net debt and plenty of firepower for further acquisitions and/or capital management, as well as its $US80 billion pipeline of organic expansion.
*This article first appeared on Business Spectator