One of the most telling things about BHP Billiton's (BHP) acquisition of Petrohawk (HK) is the 65% premium it paid for the company. Back in January, I wrote about buying Petrohawk because of its shift into Eagle Ford and anticipated higher natural gas prices.
BHP’s acquisition of Petrohawk, however, may be more about the Wolfcamp shale than Haynesville and Eagle Ford. Don’t get me wrong, BHP gets 225,000 newly developed Haynesville acres thanks to Petrohawk's drill-it-all approach last year. And, Eagle Ford is booming with activity this year, and remains very under-developed. Which means BHP’s deep pockets are going to come in very handy when it comes to exploiting Petrohawk’s 332,000 Eagle Ford acres, especially in oil rich Red Hawk field.
But the real jewel of the necklace may be Petrohawk’s newest asset. In mid 2010 it began a land grab in the Permian Basin. And, in short order Petrohawk built a 325,000 net acre position in the oil rich Midland and Delaware basin. Specifically, Petrohawk quickly built a huge position underneath Spraberry Field, one of the most significant oil fields in North America. And, with this yet-to-be-tapped opportunity in the lower Wolfcamp shale, Petrohawk positioned itself away from a primarily natural gas producer to a truly balanced oil and gas play.
How important was the Permian Basin to Petrohawk’s strategy? This year, the company was planning to spend $75 million drilling 15 wells. A good start with a lot more coming behind it thanks to Haynesville and Eagle Ford cash flow. And, coupled with Eagle Ford, Petrohawk was guiding the street to model for 50% of its revenue coming from crude in 2013, up from 33% this year. Estimates peg Wolfcamp shale at 1 billion barrels, making it a significant field.
For BHP’s part, the company has been an active dealmaker the past two years as it aims to inject youth into its aging portfolio. And, clearly, it has set sights on shale plays given its March acquisition of Chesapeake’s (CHK) Fayetteville assets. BHP’s focus suggests majors are more than willing to lock up proven shale acreage. And, it's likely big oil will continue to build exposure to Western plays given the resources already available in Texas, and North Dakota.
While a lot of natural gas shale stocks rallied on the Petrohawk deal, caution is warranted. Particularly when we consider how focused Petrohawk had become on oil shale. Those independents with oil rich shale properties are the ones most deserving of substantial M&A premiums in the wake of this deal.
More importantly, those with exposure to the Permian basin are especially attractive, particularly as we consider Wolfcamp could become 2012’s version of 2011’s Eagle Ford production boom.
So, which stocks are in the Wolfcamp shale? Pioneer (PXD) is already active thanks to its existing Spraberry field assets, which gives it access to Wolfcamp. Devon Energy (DVN) is sitting on nearly one million net acres. Linn Energy (LINE) has 800 wells there. And, SandRidge (SD) has 243,000 net acres. Whiting Petroleum (WLL) is an interesting play, with 83,000 net acres in the same Delaware formation area as Petrohawk at a cheap $516 per acre. And, Whiting is expected to earn $5.30 per share in 2012, up from $2.83 per share in 2010, giving it plenty of dry powder to spend in Wolfcamp. Energen (EGN) also has 40,000 net acres, which it bought from SandRidge back in December for $110 million. Gulfport (GPOR) is an interesting small play that is expanding its Gulf of Mexico position onto land in the Permian basin with just shy of 15,000 acres. Chesapeake has 290,000 net acres. EOG resources (EOG) has 120,000 and Conoco (COP) is building a position there too. Some of the smaller players, including Whiting, may be take-over targets.
It pays to stay away from the rearview mirror when it comes to investing in oil and gas stocks. Which suggests investors excited about Eagle Ford today, may become more excited about Wolfcamp next year. And, if that’s the case investors will be well served sprinkling Permian Basin stocks into portfolio’s during the typically lackluster summer months.