M&A will boost investment case for natural gas

18 Jul 2011 | 11:55
Jonathan Waghorn & Mark Lacey

Investec’s Jonathan Waghorn and Mark Lacey say BHP Billiton’s latest acquisition bodes well for the US natural gas sector.


Representing the largest acquisition of a US Exploration & Production company since Exxon acquired US gas producer XTO Energy in 2009, BHP Billiton’s latest acquisition of unconventional shale natural gas company Petrohawk Energy highlights both the current attractive valuation of natural gas E&Ps, and the strategic importance of US natural gas, in our view.


At prices of $38.75 per share representing a 65% premium to Petrohawk’s previous close and an enterprise value of $15bn, this transaction is significant for a number of reasons:

Firstly, BHP’s status as one of the most respected and sophisticated companies in its sector combined with its willingness to pay a premium to acquire high quality onshore US natural gas assets underlines both the value we see in natural gas E&Ps and the strategic importance of the commodity for the future.

Not only does BHP have extensive knowledge of the global commodity markets, it also has some of the most detailed insight on long term Chinese energy and mineral demand. BHP’s decision to acquire Petrohawk will enable it to access a large amount of cheap, long lived, clean energy resource in a politically and fiscally stable country.

Secondly, according to our analysis, the price paid is in line with our existing target price on Petrohawk shares of $39/share. This target is based on a detailed valuation of Petrohawk’s assets using our long term Henry Hub natural gas price of $6/mcf.

It is expected that BHP will increase the pace of development of Petrohawk’s assets to deliver increased value from the deal, whilst also using the acquired technology and experience to potentially drive other natural gas and shale acquisitions.

Finally, we believe this deal has positive implications for the US natural gas E&P sector.

It is likely that further M&A activity in the sector will take place as US natural gas prices and natural gas company valuations remain depressed at a time when high oil prices are helping the large integrated oil companies to generate significant cash surpluses.

Based on recent events and set in the context of our long term views, we believe that the outlook for US natural gas has been further strengthened, with current valuations representing a highly attractive entry point for investors.


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