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.
The quarterly production result is a modest favorable influence also. On balance, BHP's fourth-quarter 2011 operating performance was in line with expectations. In the main, production was strongly higher, though still recovering from weather impacts in the prior period. Our fiscal 2011 and 2012 earnings forecasts are little changed.
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