Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
BHP Billiton’s friendly $12 billion takeover of the US gas company Petrohawk is the group’s largest in six years, and its most ambitious foray into the controversial business of shale gas extraction through a process called hydraulic fracturing or fracking.
While the transaction is a coup for Petrohawk – its shares duly rose 65% to match the takeover price – analysts are skeptical about the prospects of BHP Billiton, the world’s most valuable miner, making a success of the deal considering its poor track record with acquisitions, its relatively limited experience in the fracking business, environmental concerns and warnings that it is again buying at the top of the cycle.
Industry research consultants Wood Mackenzie reported companies including majors like Exxon and BP splashed out $39 billion buying U.S. shale gas companies and assets last year, equivalent to 21% of all global oil and gas mergers and acquisitions activity. This has prompted analysts to warn that BHP may again be buying at the top of the cycle.
ABC in Australia has a podcast that lays out some of the biggest criticisms agains the deal saying after BHP’s expensive and ultimately failed $40 billion takeover of Potash Corp of Canada last year and 2008’s doomed $130bn acquisition of rival Rio Tinto CEO Marius Kloppers was under pressure to come up with deals. ABC also mentions that BHP’s moves into oil and gas is not where the miner’s traditional strengths lie.
Reuters highlights the fact that US gas prices may not be high enough for profitable extraction quoting analysts at UBS investment research’s estimates that natural gas prices need to be between $5.50 and $6.00 per million British thermal units (BTU) to justify tapping into shale gas fields. Between 2004 and 2008, US natural gas prices traded well above this level, but prices averaged only $4.32/million BTU in the second quarter.
In an opinion piece The Wall Street Journal (sub required) asked if Kloppers ever looks at Exxon Mobil’s share price pointing out that Exxon’s $41 billion acquisition of natural-gas producer XTO Energy in December 2009 has weighed on its stock price ever since.
MiningMAX points out a number of well-timed bullish bets in options of Petrohawk ahead of Thursday’s announcement of the pending takeover has raised eyebrows among some options market watchers, who said the activity could also draw the eye of securities regulators.
The Wall Street Journal (sub required) also profiles Petrohawk founder Floyd Wilson describing how eight years ago he cobbled together $60 million and created the company, even designing the logo himself on a napkin. The WSJ says Wilson has been here before. Part wildcatter, part deal-maker, the 64-year-old executive has a track record of building up oil and gas exploration companies from scratch.
BusinessLive describes the importance of of shale gas in the US saying it has altered the country’s energy mix by cutting its dependence on fossil fuels, and reduced the volumes of its imports. Extraction of shale gas in the US has tripled the lifespan of gas reserves and offered a lower-carbon alternative to coal. Shale gas is expected to account for half of the US gas output by 2030.
Fracking technology has dramatically increased natural-gas extraction and made it economically viable but a widely-cited study published in Proceedings of the National Academy of Sciences has raised concerns over the possible pollution of drinking water through methane leaks. The process involves pumping a mixture of water, sand and chemicals into a well to fracture the rock and release the natural gas.
