DBRS Comments on BHP Billiton’s $15 Billion Acquisition of Petrohawk Energy

DBRS notes today that BHP Billiton plc (BHP Billiton or the Company) and the U.S. oil and gas producer Petrohawk Energy Corporation (Petrohawk) have entered into a definitive agreement for BHP Billiton to acquire Petrohawk for approximately $12.1 billion, representing a total enterprise value of approximately $15.1 billion, including the assumption of net debt of approximately $3.0 billion. Petrohawk is an active player in several U.S. shale gas plays, which DBRS believes will complement BHP Billiton’s acquisition in February 2011 of $4.75 billion of Chesapeake Energy Corporation's interests in the Fayetteville shale gas play in Arkansas as well as BHP Billiton’s other U.S. oil and gas operations.

Although the Petrohawk purchase is expected by DBRS to require significant additional capital investment to reach its production potential, DBRS views the purchase, if completed as proposed, as affordable and it would enhance BHP Billiton’s petroleum business without a material negative impact on its debt leverage and other financial metrics. Accordingly, the successful acquisition of Petrohawk would not be expected to affect the Company’s ratings.

Petrohawk is an independent oil and gas producer and marketer in the United States, with estimated total proved oil and gas reserves of approximately 3,392 billion cubic feet of natural gas equivalent (bcfe) consisting of 3,110 bcf of natural gas, 20 million barrels (MMbbls) of oil and 27 MMbbls of natural gas liquids. All of Petrohawk’s assets are in Texas and Louisiana. Petrohawk also has a current non-proved resources base of 32 trillion cubic feet of natural gas equivalent.

Petrohawk’s first-quarter production of 0.95 bcfe/d, or 158,000 barrels of oil equivalent per day (boe/d), was modest given its reserve and resource base. DBRS expects that the Petrohawk assets to be acquired by BHP Billiton will require significant additional development investment to reach their production potential. Petrohawk estimates its annualized adjusted EBITDA for the first quarter of 2011 was approximately $1.2 billion, about one-13th of the $15.1 billion enterprise value of the transaction. As well, DBRS estimates the BHP Billiton offer represents about $24 per boe of proved reserves.

At December 31, 2010, BHP Billiton had approximately $16 billion in cash on its balance sheet and significant borrowing capacity. Commodity prices have been strong in the first half of 2011, leading to our expectation of robust operating cash flow for the Company, allowing the transaction to be financed from BHP Billiton’s cash resources and credit facilities despite the completion of a $6.3 billion share buyback in April 2011 and a large capital expenditure program. The Petrohawk board of directors has unanimously recommended the Petrohawk shareholders accept the offer. Although the acquisition is subject to the terms and conditions set forth in the merger agreement, the transaction is expected to close in the third quarter of 2011.

Notes:
All figures are in U.S. dollars unless otherwise noted.

This comment is based on public information.

The applicable methodology is Rating Companies in the Mining Industry, which can be found on our website under Methodologies.