Santos takes out esg, page-3

--Your editor missed all the excitement last week. He was up on the rainy Sunshine Coast to follow up on the shale gas story told in Revolution in the Desert. And some of the very events discussed in that report began to gather pace over the last few days. Today?s Daily Reckoning will tell you what it means for energy and precious metals stocks.

--Let?s start with energy. BHP?s $14.1 billion bid for US shale-gas play Petrohawk Energy is obviously the big news of the last few days. What does it mean? Let?s break it down three ways: what it means for BHP, what it means for shale gas, and what it means for the shale gas industry in Australia.

--For BHP shareholders the question is whether BHP is right about the direction of gas prices. BHP is basically making a bet on higher gas prices. Analysts in Australia have rubbished the deal (on a short-term basis) because they believe BHP can generate higher returns on assets like iron ore and coal.

--From BHP?s perspective, there are only two counter arguments. One: under Marius Kloppers the company is making a bad deal for the sake of a doing any deal. Better to look busy that just do another boring old share buyback. That?s one explanation.

--The other explanation is that Kloppers thinks this is the bottom for natural gas. There haven?t been too many commodities trading near bargain prices. But natural gas is one of them. The huge supply boom/glut from US shale is part of the reason. A bet on gas now is a bet on higher demand.

--It?s also a bet on gas becoming more important in the world?s energy mix. That seems like a given, and not just because it?s the main conclusion we draw in Revolution in the Desert. It seems like a given because gas is the most logical and likely replacement for coal as the fuel for new power plants. Australia?s own carbon tax favours gas to the extent that it will lead to the phase out of coal-fired power stations.

--There is also the issue of depletion in conventional oil fields. One of the real eye openers from our trip to the Offshore Technology Conference in Houston is how expensive it?s going to be finding and producing the next trillion barrels of oil. They?re out there. But they?re in remote and hostile places.

--If shale gas reserves are developed in the countries that are thought to have them, it will mark a shift from an oil-dominated global energy market to...whatever comes next. If you want to know what comes next...or at least what we think comes next...watch Revolution in the Desert.

--Is BHP overpaying for Petrohawk? Petrohawk has 3.4 trillion cubic feet of proved natural gas equivalent reserves (Tcfe). It has a resource base of 35 Tcfe. Prior to BHP?s offer?which Petrohawk has embraced?the company said it expected to produce 950 million cubic feet of gas a day this year, with liquids accounting for 15 per cent of output.

--Remember BHP spent $4.5 billion on the Fayetteville shale assets of Chesapeake Energy earlier this year. When you add up its existing oil and gas production with its new US acreage, BHP is on pace to produce a million barrels of oil equivalent a day in five years. That?s a lot of oil for a mining company.

--But obviously BHP has seen the projection that shale gas will make up one-half of US total gas production by 2020. Low prices generate demand. And BHP seems more than happy to cop the short-term negative analyst coverage in order to make a long-term bet that when gas prices are higher, the return on its new assets will look a lot more attractive to shareholders.

--We?ll ask our valuation expert Greg Canavan what he thinks. And we?ll see if our resident in-house trader Murray Dawes sees anything in the BHP chart you should know about. But our main observation is that BHP has put itself in position to be the world?s 7th largest oil and gas company based on its total resources.

--This is clearly a bet on energy commodities having a lot more growth potential than bulk commodities, like iron ore and coal. Is it the right bet? We?ll see. The other important question is whether BHP shares are a good bargain.

--BHP paid a 61% premium for Petrohawk?s shares, based on a 20-day average of its share price. You only do that sort of thing when you believe in the long-term case for buying energy assets when they?re cheap. It?s really a bet on energy and gas. And it also echoes the Accelerated Transformation Program of Saudi Aramco that we spoke about in Revolution in the Desert. When you have world-class companies shifting their strategic focus to accommodate a new set of facts on the ground, you should find out what those facts are.

--By the way, developments on the ground here in Australia are already heating up in the shale gas space. We?ll write more about that tomorrow. But BHP would certainly hope to learn a lot about producing shale gas in the States. It is knowledge that could come in very handy in developing Australia?s shale gas assets, of which there are many.

Regards,

Dan Denning
Daily Reckoning Australia