20 Jul 14:00
By Christopher Hinton
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Wall Street thought Petrohawk Energy Corp. (HAWK) was
ready to put itself on the market earlier this year - but instead, it surprised
everyone by buying KCS Energy Inc. in a $1.9 billion deal that essentially
doubled its size.
Investors pulled out, and Petrohawk's shares sank 24% over the next two
months to a 52-week low of $10.01 from $13.58. More recently, the stock has
bounced back, closing Wednesday at $11.48.
Analysts say the stock is cheap, as it currently trades at about three times
the average fiscal 2007 cash-flow estimate of $3.57, while similar companies
such as Comstock Resources Inc. (CRK) trade at about five times their
estimates. Furthermore, the KCS deal has made Petrohawk more attractive to
buyers by increasing its reserves and lowering its cost structure.
Meanwhile, the company's goal is still to sell, according to Petrohawk Chief
Executive Floyd Wilson, and the acquisition of KCS hasn't changed that.
"The buyout caught a lot of people off guard, including ourselves," said
Friedman Billings Ramsey analyst Dave Khani, who has since raised his price
target for the stock to $20 from $18.
Khani also raised his 2007 earnings estimate to $1.17 a share from $1.09 and
his cash-flow estimate to $4.17 a share from $3.95.
The 'Real Fit'
Following the KCS deal, Petrohawk's net asset value grew from $13.22 in 2005
to a 2007 estimate of $18.65, assuming $50-a-barrel oil and natural gas at
$7.50 MMBtu, or 1 million British thermal units, according to Coker & Palmer
analyst Brian Corales.
Petrohawk's proven reserves, all of them domestic, increased to almost 1
trillion cubic feet of natural gas equivalent, or Tcfe, from 517 Bcfe.
By crossing the 1 Tcfe mark, the company now has enough development inventory
to get the attention of the large, integrated companies with businesses in
every aspect of oil and fuel production, according to Jim Wilson, a securities
lawyer for the energy industry at the King & Spaulding law firm in Houston.
Those companies could include Exxon Mobil Corp. (XOM), Chevron Corp. (CVX),
Royal Dutch Shell PLC (RDSB) and BP PLC (BP) - the so-called "majors," Wilson
said.
"M&A activity is pretty brisk right now, with a huge focus on North
America...and 1 Tcfe (in proven reserves) is a pretty fair amount," he said.
To its benefit, Petrohawk also now has more than 2 Tcfe in unproven reserves,
which could add a premium to analysts' price targets in the event the company
is sold.
"There's no reason to buy a company unless there is an upside to unproven
reserves," Petrohawk's Wilson said.
KCS was a "real fit" for Petrohawk, as both companies operate in the same
areas, concentrated in north Louisiana and east Texas, with low-risk drilling
reserves, the CEO said.
Additionally, KCS' lower cost structure has helped to bring down Petrohawk's
cost-production average because KCS was further along in development and
tapping more conventional reservoirs.
"In north Louisiana, KCS was a major operator, so we just turned over our
assets to their staff," Wilson said.
The End Game
Analysts believe that Petrohawk likely will sell in about 18 months, though
the company declined to give a time line. Nor would the company suggest a
selling price, though currently it has a market capitalization of about $1
billion with a 51% debt-to-capital ratio.
Petrohawk's CEO said a sale won't occur before "the dust settles" from the
KCS merger, which it completed last week, as the new company trims operations
and sells some poorer assets.
"The end goal is to gift wrap a portfolio of low-cost, high cash flow assets
that have significant inventory to other operators," Coker & Palmer's Corales
said.
"Since management has been honest about building a company to sell, the fair
market value in the stockmay not be realized until the company is sold or
merged," he said, adding that he has a buy rating on the stock with a $17 price
target.
Wilson has a track record of building companies to sell. He was CEO and
founder of Hugoton Energy Corp., which was sold to Chesapeake Energy Corp.
(CHK) in 1998, about three years after its initial public offering, for $380
million.
Wilson was also CEO for 3TEC Energy Corp., which sold for $443 million to
Plains Exploration & Production Co. (PXP) in 2003. The sale represented an 18%
premium to 3TEC's stock price at the time.
Wilson said he hasn't ruled out another acquisition like KCS.
"It all depends," he said. "It would have to be a really good fit, and we
need a reason to think we can improve it."
But for now, Petrohawk is satisfied with KCS, and the company should be able
to grow organically for a number of years without another large acquisition,
Wilson said.
Neither Friedman Billing Ramsey's Khani nor Coker & Palmer's Corales own any
shares of Petrohawk, but their firms do have an investment-banking relationship
with the company.
-By Christopher Hinton; Dow Jones Newswires; 201-938-5285;
christopher.hinton@dowjones.com
(END) Dow Jones Newswires
07-20-06 1400ET
Copyright (c) 2006 Dow Jones & Company, Inc. |
