On Aug. 8, a day when the Dow fell a jaw-dropping 634 points, Petrohawk Energy (NYSE:HK) fell by less than 1%. By the end of that week it was once again trading at a 52-week high. This gravity-defying stunt wasn’t achieved by trickery, it was a takeover offer that prompted Petrohawk to surge.
On July 14, Australian natural resources behemoth BHP Billiton (NYSE:BHP), spurned last year in its attempt to buy Potash Corporation (NYSE:POT) for $39 billion, announced it had offered to buy Petrohawk for $15 billion including debt, a 65% premium on the price of its shares.
Now in play, some shareholders are suing the company, suggesting they could have gotten more. Those shareholders are wrong. My advice is to sell your shares, take the profits and move on. A better offer isn’t coming.
There have been several deals in the past year – so the first thing to do is compare what others were willing to pay for shale acreage. Marathon Oil (NYSE:MRO) paid $21,000 per acre in June for 141,000 acres of Eagle Ford shale. Other transactions vary from $10,000 per acre up to the $22,000 BHP Billiton paid for Petrohawk’s Eagle Ford acreage.
Citigroup (NYSE:C) analyst Robert Morris wonders about some of the prices BHP Billiton paid for the acreage. Petrohawk’s average cost per acre in the Permian basin was $1,400, yet BHP Billiton paid $6,200. As for Eagle Ford, Morris suggests they paid at the very top of the range.
I suppose there’s always someone willing to pay more but I doubt they’re going to materialize in the immediate future. If that were the case, why would you continue to hold this stock?
Profitability concerns
Have you looked at Petrohawk’s financial statements? It was up to its eyeballs in debt used to buy land all over hell’s half acre. It lost $1.1 billion in the past five years on $5.2 billion in revenue. In the second quarter, although profits and revenues were good, its debt exceeded shareholder equity for the first time in the past decade. With no cash on hand to speak of and costs rising by 60%, shale exploration and production is a rich man’s game.
Petrohawk CEO really had no alternative but to take the deal despite the Wall Street Journal’s assertion that international energy companies are willing to blindly part with their cash no matter the market value. That’s simply not true. This was a unique situation and I doubt we’re going to see many other large deals like this one in 2011.
Potential Law Suits
Ambulance chasers across America are gleefully conducting investigations into whether Petrohawk’s board of directors breached its fiduciary duties by not shopping the company adequately. Investors who think this tactic will be successful are truly delusional. Floyd Wilson, CEO of Petrohawk has sold two other energy businesses in the past and knows a thing or two about being on the right side of a deal. If Wilson thought there was another buyer to be had, I’m sure he would have found him or her.
You can’t always assume that because one large company is willing to pay seven times forward EBITDA that another will too. Everybody’s needs are different.
Bottom line: Sell HK stock now!
If you own Petrohawk stock, don’t wait around for a better offer. Sell. Your money is better utilized elsewhere.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
