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Posts Tagged ‘petroleum’

BHP to Acquire Petrohawk Energy in $12 Billion Deal

July 20, 2011 Comments off

“BHP Billiton Ltd. said Thursday it plans to acquire Petrohawk Energy Corp. for more than $12 billion in cash, giving the Anglo-Australian mining company access to large shale assets in Texas and Louisiana in one of the largest deals of the year. BHP will pay $38.75 per share, a 65% premium to Petrohawk’s closing price on Thursday of $23.49 a share.

The deal marks an important strategic step for BHP, which last year was rebuffed in a highly politicized $38.6 billion bid for Canada’s Potash Corp. of Saskatchewan Inc. One of the largest global mining companies, BHP has been eager to spend its war chest to diversify from minerals and mining into oil and gas. The Petrohawk deal will double BHP’s resource base in oil and gas, allowing the company to increase its production by about 10% for the rest of the decade, the company said.”

Source: Wall Street Journal, July 15 2011

Observations:

  • Key synergies targeted in the deal are in financing new projects: Petrohawk has the reserves, and BHP brings the funds to develop them. The premium of 65% reflects this increased investment, as it values the company on 7.5x PE rather than 4-5x PE.
  • Last February BHP bought a set of shale gas assets from Chesapeake Energy for close to $5bln.
  • In a poll on this blog in February 57% of respondents thought BHP should expand further in the oil & gas arena.

Implications:

  • The $12bln tender offer is all-cash, largely solving BHP’s ‘problem’ of a huge cash pile that some people rather had seen returned to shareholders. With current high iron ore prices the company is generating cash much faster than it is able to invest in organic growth.
  • The acquisition increases the weight of the petroleum business in BHP’s portfolio and makes BHP enter in the top 10 of largest petroleum companies in the USA. This development follows the entry of various large petroleum companies in the mining area through oil sand projects. Still it is unclear if more miners will position themselves as ‘large scale commodity producers’ active in both mining and petroleum businesses.

©2011 | Wilfred Visser | thebusinessofmining.com

BHP to Buy Chesapeake Shale Assets

February 23, 2011 Comments off

“BHP Billiton Ltd. said Monday it is acquiring Chesapeake Energy Corp.’s Fayetteville shale gas holdings in Arkansas and some pipeline assets in a deal totaling about $4.75 billion in cash.

Earlier this month, Chesapeake announced plans to sell about 487,000 acres of its Fayetteville shale holdings as part of a plan to reduce its debt by 25% in two years. The deal would increase BHP’s gas reserves and resources by 45%.

This acquisition would mark BHP’s first shale gas asset. The company, primarily a miner, gets about 20% of its profits from oil and gas. Most of its assets are in Australia, the Gulf of Mexico, Algeria and Pakistan. The Arkansas asset would likely supply natural gas mostly to utility companies.”

Source: Wall Street Journal, February 22 2011

Observations:

  • ExxonMobil started a run to acquire shale gas assets in December 2009 by paying $41bln for XTO Energy (incl. taking on $10bln debt). The deal was made contingent on the senate investigation into hydraulic fracturing; the method used to enhance production of gas from shale.
  • BHP pays $1.77/Mcf of proved gas reserves, about 30% below the price paid by ExxonMobil for XTO, but in line with recent other acquisitions in the industry.

Implications:

  • BHP can still expand in the oil and gas industry without triggering the regulatory roadblocks it faces when trying to expand its position in many mined commodities. It would therefore not be unlikely if it makes more acquisitions in the industry. Some analysts critique the diversification of the company, arguing that shareholders have little benefit from the combination of mining and oil/gas in one firm.
  • The natural hedge created by combining mining & oil/gas (benefiting from higher oil/gas prices on the sales side while being hurt at the same time in fuel and electricity prices) does enable the company to promise a steady cash flow to investors.

©2011 | Wilfred Visser | thebusinessofmining.com

The BP Oil Spill: Could this happen in mining?

June 7, 2010 1 comment

The blowout on deepwater horizon was caused by a series of errors, classified as questionable decisions [D], mistakes [M] and violations [V]. In the report of events below the bad decisions, mistakes and violations have been identified.


“Internal BP documents show that BP engineers had concerns as early as 2009 that the metal casing BP wanted to use might collapse under high pressure. In March, 2010, the rig was experiencing problems that included drilling mud falling into the undersea oil formation, sudden gas releases, a pipe falling into the well, and at least three occasions of the blowout preventer leaking fluid. According to a report by 60 Minutes, the blowout preventer was damaged in a previously unreported accident in late March, and BP overruled the drilling operator on key operations [V]. BP declined to comment on the report. The American Bureau of Shipping last inspected the rig’s failed blowout preventer in 2005.

On March 10, 2010, a BP executive e-mailed the Minerals Management Service that there was a stuck pipe and “well control situation” at the drilling site, and that BP would have to “plugback the well.” A draft of a BP memo in April warned that the cementing of the casing was unlikely to be successful. Halliburton, a week after the explosion, said that it had finished cementing 20 hours before the fire, and that it cemented the Macondo well but had not set the final cement plug to cap the bore as “operations had not reached a stage where a final plug was needed” [D]. A special nitrogen-foamed cement was used which is more difficult to handle than standard cement.

In late April, 2010, Adrian Rose, a vice president of Trans-ocean, Ltd., said that workers had been performing their standard routines and had no indication of any problems prior to the explosion. However, preliminary findings from BP’s internal investigation released by the House Committee on Energy and Commerce on May 25 indicated several serious warning signs in the hours just prior to the explosion. Equipment readings indicated gas bubbling into the well, which could signal an impending blowout [V].

The fire aboard the Deepwater Horizon reportedly started at 9:45 p.m. CDT on April 20, 2010. According to Transocean executive Adrian Rose, abnormal pressure accumulated inside the marine riser and as it came up it “expanded rapidly and ignited”. According to interviews with platform workers conducted during BP’s internal investigation, a bubble of methane gas escaped from the well and shot up the drill column, expanding quickly as it burst through several seals and barriers before exploding. Rose said the event was basically a blowout. Survivors described the incident as a sudden explosion which gave them less than five minutes to escape as the alarm went off.

At an April 30 press conference, BP said that it did not know the cause of the explosion. Transocean chief executive Steven Newman described the cause as “a sudden, catastrophic failure of the cement, the casing or both.” The heavy drilling mud in the pipes initially held down the gas of the leaking well. When managers believed they were almost done with the well, they decided to displace the mud with seawater [M]; the gas was then able to overcome the weight of the fluid column and rose to the top.“

Source: Wikipedia report on BP Oil Spill, June 4 2010

Firstly, could the same decision making situation develop in mining as well? Yes, it could. Just as in the cases of Chernobyl and the Challenger, psychological effects have played an important role in the framing of the organizational behaviour which allowed the accident to happen. The most important effects James Reason mentions in his report “the Chernobyl errors” are:

  • Forgetting the power of the beast. Operators get so used to working with large and potentially dangerous objects that they forget the potential impact of a mistake.
  • Rationalizing away. What are the odds that something will go wrong? It won’t happen to us!
  • Trusting the others will know/act. Especially in interaction between groups uncertainty is not shown. In the Deepwater case the interaction between Trans-ocean, BP and contractors will have contributed to this situation of groupthink.

Secondly, are there situations in mining that could have an impact comparable to the oil leak in the Gulf of Mexico? The fact that it takes some time to think about examples shows just how much we are used not to think about potential consequences of our actions. Both the health/safety and the environmental impact of the blow out can certainly be matched in mining. The numerous mine explosions in coal mining, slides in open pit mines and caving above underground mines are just examples. “The big one” could happen anytime and anywhere. Similarly, breaking tailings dams, uncontrolled leaching operations and many other process related accidents could destroy the flora and fauna in a large area, especially when the poison is spread by a river.

Finally, mining shares the schizophrenic safety culture with the petroleum industry. Most companies are very strict about personal safety, but relentlessly driven by production targets in operations at the same time. This culture results in a frequent disregard of potential hazards or even violation of “redundant rules” in making operational decisions that do not directly appear to be related with personal safety. In the BP case this was the cementing of the casing, in the mining case this could be the spacing of boreholes or the dewatering of a dump. As long as miners don’t learn to think about the power of the beast, an “oil spill” could certainly happen in mining.

©2010 – thebusinessofmining.com