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BHP predicts shale-gas consolidation

Maturing industry means acquistions are “logical progression”, says CEO

The head of BHP Billiton says consolidation of US shale gas is the next “logical progression” as the industry matures and enters a more capital-intensive development phase.

BHP boosted its US shale-gas position late last week with its $15.1 billion take-over of Houston-based Petrohawk, a dominant player in Texas’ Eagle Ford Shale. Petrohawk, with 650 employees, will triple BHP’s reserve base and make it one of the top-10 independent producers in the US.

Earlier this year, BHP paid $4.7 billion for shale-gas assets in Arkansas, coming on the heels of ExxonMobil’s $40 billion acquisition of XTO Energy.

Following conclusion of the deal, oil and gas will represent about a third of BHP’s total revenues, said chief executive Marius Kloppers, who credited smaller independent companies for developing the technology that has unlocked a century of new gas reserves, according to estimates from the US Energy Information Agency.

But Kloppers claimed these companies face a harder time raising the extensive amounts of money needed to develop shale-gas assets at a significantly higher cost of capital. Some financial analysts have speculated that BHP will need to spend upwards of $50 billion over the next decade to fully develop its new purchases and double its US production to about 1 million barrels a day of oil equivalent.

“As the US shale industry has started to mature, these entrepreneurial companies have been forced to shift their focus towards development and, like many commodity industries, shale-gas development is capital intensive, which means that financial capacity has become the new challenge,” he said.

Analysts also said BHP is looking for counter-cyclic acquisition opportunities to take advantage of low valuations for natural gas producers. High prices for BHP’s traditional products, such as copper and iron ore, have limited the number of targets in its core mining business.

The company has a sizable balance sheet to make deals, but its overtures have been thwarted in other parts of the world. A $40 billion bid for Canada’s Potash Corporation, the world’s largest producer of minerals used in fertiliser, was rejected by the Canadian government in late 2010 after it was deemed not to be in the public interest.

But Kloppers said shale-gas fits in with the same long-term strategy it has used to develop resources such as copper. “We are always about being large. Large resources: that is what I always stress. And we always prefer those resources where there are multiple decades of technology that will play out.”

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