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Petrohawk Was Built to Sell, but Premium Notable

(Updated with the Eagle Ford takeover targets, analyst comments)

NEW YORK ( TheStreet) -- The above-60% premium that BHP Billiton (BHP) is offering for Petrohawk Energy (HPK) takes out an independent natural gas company that has had a "for sale" sign on its lawn for as long as many U.S. homeowners.

But don't expect a wave of consolidation to necessarily follow, though the premium paid for Petrohawk makes a case for some higher valuations in the natural gas space.

In November 2010, when Chevron (CVX) acquired Atlas Energy, the market speculation ran wild with the next takeover targets in the independent exploration and production market. An article on TheStreet at that time, in fact, highlighted Petrohawk as top target in the sector.

Dan McSpirit, analyst at BMO Capital Markets, described the deal announced on Friday as involving a willing seller more than anything else. "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 underway."

"We believe this deal is more about Petrohawk than about a larger corporate consolidation trend. We believe that HK was simply a willing seller (and who got a bid). Let's not forget the "For Sale" sign that's been on the company's front lawn for years," BMO Capital wrote on Friday morning.

Mike Jones, an analyst with Imperial Capital added, "Petrohawk has been marketing itself for two to three years building on top of its Hainesville acreage with a move into the Eagle Ford and a little in the Permian so it can be sold. It's always been for sale." Jones noted that at its share price high in 2008, Petrohawk traded at was $48. "It's a good price, and they took it," Jones said.

BHP has also recently been a willing buyer of shale assets. In February, it signed a $4.75 billion deal with Chesapeake Energy for shale assets, its first deal since the failed bid to acquire fertilizer giant Potash (POT). The acquisition of Petrohawk gives BHP 1 million net acres across some of the best leasehold in the Eagle Ford and Haynesville shales.

The pricing on the deal valued Petrohawk at $38.75 per share vs. a Thursday close of $23.49. The implied enterprise value price [2010, proven reserves] is $4.50/Mcfe, "a big number," BMO wrote. BHP is also assuming $3 billion debt from Petrohawk as part of its $12 billion acquisition.

Morningstar analyst Mark Hanson wrote on Friday, "The deal looks like a phenomenal one for Petrohawk shareholders, at 17 times trailing EBITDA of $880 million, $15,000 per net acre."

On a forward-looking EBIDTA basis, BMO Capital estimates the deal at 7.5 times 2012 EBITDA, with EBIDTA at $2 billion next year, versus $880 million in 2010 EBIDTA which Morningstar used to arrive at the 17 times EBIDTA multiple.

To support the view that the Petrohawk deal could be an isolated event, though, BMO noted that strip pricing won't get above $5.00/MMBtu for the next 24 months, and Petrohawk has "a somewhat chronic cash flow outspend," providing the drivers and support for a deal.

Imperial Capital's Jones doesn't expect the proverbial wave of consolidation either, though he looked more to Petrohawk's profile, as opposed to cash needs, as a reason for its premium valuation. For one, he said Petrohawk had a multibasin profile that makes it attractive to the big buyers, and there are more companies among the independents that remain too tied to one basin for a complete revaluation of the sector to make sense. In fact, Jones says that as stocks throughout the independent energy space run up like they did back when Exxon Mobil bought XTO Energy, as many good shorts as potential takeout premiums will be revealed.

This doesn't mean it's not a good thing for the natural gas industry, though, with recent high-profile attacks on the concept of shale drilling, from the ongoing fracking controversy to the recent New York Times piece accusing the shale drilling industry of being more or less a Ponzi scheme.

Jim Cramer noted on RealMoney, "Given that BHP has already had tremendous success with its Fayetteville assets for $4.75 billion back in February -- an area, by the way, that the Times highlights as being especially overvalued if not downright uneconomic -- this is a sign that a smart acquirer knows these assets are long-lived and solid." Cramer expects foreign buyers in particular to continue to target energy companies. "It would not shock me if more foreign companies did more buying before long."
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