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BHP Billiton Invests $15 Billion Into “Ponzi Scheme”


The NY Times recently published an article about Shale Gas drilling and quoted an IHS analyst who described investment into shale gas as a “ponzi scheme.”  If you were to believe this, then you would believe that BHP Billiton has willingly thrown away $20 Billion in 2011 alone.  With the acquisition of Chesapeake assets in the Fayetteville Shale ($4.75 Billion) and the more recent acquisition of Petrohawk ($12.1 Billion + $3 Billion in debt), BHP has joined the ranks of non-US companies buying up domestic shale resources.   CNOOC, KNOOC, Statoil, and Reliance are a just a few of big names who also have significant investments in unconventional resources in the United States.

This blog is not about the debate over the NY Times article (we’ll just assume that BHP is not voluntarily throwing $20 Billion away).  This blog is about some of the basics of the BHP/Petrohawk deal.  Essentially, with the acquisition of HK,  BHP has acquired acreage is in the gas rich Haynesville Shale (225K net acres) and Lower Bossier Shale (120K net acres), a condensate/wet gas position in the Eagle Ford Shale (332K net acres), and an oil rich position in the Midland and Delaware Basin (325K net acres, combined).   As of their most recent investor presentation, HK had proved reserves of 3.4 Tcfe with an additional 27.4 Tcf + 406 Mmbc + 495 Mmbngl of risked resource potential.


Using some quick math calculations, this deal comes out to about $15K per acre and $4.44 / proved Mcfe.  Both of these values seem reasonable considering recent deals and future potential of the assets, particularly the undeveloped West Texas assets.

The table above shows operated gross production for HK.   The interesting things to point out are that there is no current Midland or Delaware Basin production from HK, which is planning to spend $75 million on 15 wells in 2011.  The Lower Bossier Shale has only a few wells right now, but 6.5 Tcf of risked resource potential.  And HK’s Eagle Ford assets are some of the best in the wet gas area, if not the entire Eagle Ford.  Peak monthly production for the wells is average 358 bbls/d and 4 mmcf/d.  The Elm Grove and Caspiana Fields in North Louisiana are mature Hosston and Lower Cotton Valley assets with 290 BCFE of proved reserves (83% PDP), which could easily provide  cash flow to fund the Haynesville and Lower Bossier Shale projects.

When examining the type curves for recent HK production, the only asset with significant liquids production is the Eagle Ford.  The expected liquids production from the Midland and Delaware Basin increased the valuation of HK.  However, the type curves for the gas production show early on how the Lower Bossier Shale could easily produce the same results as the Haynesville and turn into a similarly world class shale gas asset .

Currently, production from HK is around 90% gas and 10% liquids, totaling close to 3.5 Bcfe/d.  HK expects the liquids production to be at 13% by the end of 2011 and 24-28% by the end of 2013.  Even with the expanding liquids portfolio, BHP’s acquisition of Petrohawk signals that the industry expects gas prices to recover and that assets like the Lower Bossier Shale will be economic and provide substantial growth.

One last important item to note is that BHP not only bought Petrohawk’s assets, but also bought their people and technology.  Petrohawk has been one of the innovators in shale gas drilling and with the acquisition, BHP quickly moves ahead of the learning curve.  The chart above details the impact of Schlumberger’s HiWAY frac on key Eagle Ford wells and shows just one example of how people and technology pushed HK to the top of the unconventional ladder.

In the end, the HK acquisition could prove to be a great move by BHP, allowing them to gain world class assets and world class experience in one transaction.

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