BHP's 4Q Results Overshadowed by Petrohawk Bid

With BHP Billiton's fourth-quarter operating performance in line with expectations, it is the acquisition of Petrohawk that triggers changes to our EPS calculations

Mark Taylor 29 July, 2011 | 11:41AM
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BHP Billton (BLT) shares have drifted back--to be expected given the Petrohawk bid. But if the Fayetteville shale gas performance is any indicator, Petrohawk should present little to worry about for shareholders. The Fayetteville acquisition boosted group fourth-quarter 2011 gas output by around 40% to 132 billion cubic feet. Petrohawk could lift that by a further 70% again to more than 200 billion cubic feet and drive strong ongoing gas production increases. The near 50% premium BHP is paying should be viewed in the context of that production growth. Petrohawk is not a particularly onerous lick for a company market-capped at BHP's $250 billion, but it should drive strong production growth when aligned with such an enviable balance sheet.

We expect BHP gearing (net debt/equity) to push 40% levels with Petrohawk and share buybacks, but to rapidly ebb to sub-10% levels within two years, all else being equal. Annual group net operating cash flow approaches $30 billion with the current favorable commodity tailwind.

Having now modeled Petrohawk into our BHP numbers, we expect the acquisition to be mildly accretive to earnings per share and valuation. We upgrade our valuation by 6%. Approximately half is driven by Petrohawk, with the bulk of the balance reflecting the roll forward in valuation model to the next quarter.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BHP Group PLC2,058.50 GBP0.00Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.