By Simon Lack
BHP Billiton (BHP) has added support to our thesis on the natural gas sector, which is that those companies with the best positions in shale plays represent attractive acquisition candidates for the majors. Petrohawk’s CEO Floyd Wilson has been very open in saying that the assets the company owned would be better managed as part of a larger company with the resources and access to capital to develop them over twenty years or more. Natural gas is abundant in the U.S., cheaper on a BTU equivalent than crude oil-based fuels and cleaner than other fossil fuels. It’s also here in the U.S. and not in politically unstable regions of the world. It is in the long term interests of the U.S. to use more natural gas to generate electricity (rather than highly pollutive coal) and selectively even in transportation. For example, United Parcel (UPS) runs natural gas powered trucks between Ontario, CA., and Las Vegas, Nev., with filling stations at each depot.
The New York Times has been running a series of articles questioning both the environmental risks related to natural gas hydraulic fracturing as well as the estimates of reserves. We continue to believe that the environmental issues are important but manageable, and evidently BHP Billiton feels the same way.
While the cash acquisition of HK leaves little additional upside, we continue to hold our other names in the sector, all of which hold assets which we believe will be attractive at higher prices to other acquirers. Our biggest holding is Range Resources (RRC), but we also have investments in Southwestern Energy (SWN), Devon Energy (DVN) and Comstock Resources (CRK).