Market Overview

Did BHP Just Tell You To Buy Shale Plays?

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Last night, BHP Billiton Limited (NYSE: BHP) announced it would be buying Petrohawk Energy Corporation (NYSE: HK) for $38.75 per share in cash.

This is a tremendous move for BHP to get into shale gas assets, and potentially a huge revaluation of the natural gas sector, especially with such a huge premium for Petrohawk Energy, some 60%.

With this deal, BHP is saying that it wants to be a huge player in the U.S. for its vast natural gas reserves. Earlier in the year, BHP paid $4.75 billion for shale gas assets from Chesapeake Energy (NYSE: CHK). Morgan Stanley said this morning that BHP could spend as much as $65 billion developing Petrohawk's shale gas assets in the next decade.

CEO Marius Kloppers has determined to use the company's cash for a major transaction, and the move into shale gas is it. The company was unsuccessful in buying Potash (NYSE: POT) last year, and has transferred from the potash space to the shale gas space.

The move doubles BHP's resources in shale gas, giving BHP three fields in Texas and Louisiana. BHP gains 1 million net acres and now moves BHP into a top 10 oil & gas company, to go along with the company's vast mining interests in iron ore, copper, and other minerals.

Petrohawk had 3.4 trillion cubic feet of natural gas reserves at the end of 2010. This adds to the 2.4 trillion cubic feet that BHP bought from Chesapeake, and now triples BHP's acres in shale gas.

What is so drastic is that BHP is paying 18.4 times EBITDA for Petrohawk. The rest of the sector trades at 13.5 times EBITDA.

BHP's Kloppers is not a dumb man, despite pressure from shareholders to put some of BHP's massive cash hoard to work. If Kloppers thought he was overpaying for Petrohawk, he would not have done the deal. It wakes Wall Street up and makes them realize that perhaps a revaluation of the sector is in order, in light of the 61% premium for HK.

This country has an abundance of natural gas, and natural gas is slowly but surely going to be the fuel of the 21st century, at least if you believe BHP and Exxon Mobil (NYSE: XOM). Exxon Mobil's purchase of XTO Energy last year made the oil giant the largest natural gas provider in the country, and it looks as if BHP is trying to catch up to Exxon fast. Both Kloppers and Exxon's Rex Tillerson see the tremendous opportunities in natural gas, particularly shale gas. These are incredibly bright men whose words should be heeded.

Here are a few ideas on how to play the revaluation of the shale gas space.

ACTION ITEMS:

Bullish:
Traders who believe that shale gas companies will continue to get acquired at sharp premiums might want to consider the following trades:

  • Go long Range Resources Corp. (NYSE: RRC), as smaller gas companies are easier to get picked off than larger ones.
  • Another name to consider is Southwestern Energy Co. (NYSE: SWN), which at $17 billion, could be an acquirer or an acquiree.

Bearish:
Traders who believe that Kloppers is overpaying for Petrohawk may consider alternate positions:

  • Shorting names such as Chesapeake (NYSE: CHK) could prove to be profitable if the emergence of natural gas is never realized.
  • Another name to consider shorting is the United States Natural Gas Fund (NYSE: UNG), which tracks natural gas prices. If the emergence is not realized, natural gas prices will continue to stay weak.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Marius KloppersLong Ideas M&A News Short Ideas Commodities Trading Ideas ETFs Best of Benzinga

 

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