BHP's $15 Billion Lotto Ticket

8/4/2019 BHP's $15 Billion Lotto Ticket

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BHP's $15 Billion Lotto Ticket

Alan von AltendorfCWSX LLC

It is always the case in oil exploration that we have to make geologicaland economic estimates based on all of the scientific evidence which isavailable at the present time.

Observe that I did not say guesswork. Geoscience is not supposed to bea crap shoot or leap of faith. SeeThe Tragedy of 21 Darts.

Valuation of merger/acquisition in the oil space is therefore a seriousmatter, requiring sober due diligence, technical assessment of reserves,and frank discussion of whether it will benefit or hurt shareholders.

Announcement of a pending BHP deal was exciting news:

Britain's Daily Mail newspaper reported yesterday thatBHP was preparing a cash offer of $US90 a share, or$US44.6 billion for Anadarko. [Jan 2011, The Australian]

Ooops, wrong story.

Anadarko isn't for sale nor was Woodside Petroleum, nor Potash, norarch-rival Rio Tinto. Determined to buy something, BHP Billiton hookeda US minnow that habitually loses money: Petrohawk

Net Income

12/2006 117 million12/2007 53 million12/2008 -388 million12/2009 -1,025 million12/2010 189 million

total 5 years -1,054 million USD

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2/24

Yeah, But Look At All The Upside...

Anglo-Australian mining giant BHP Billiton unveileda $12.1 billion takeover of Petrohawk Energy Corp.that will give it access to the lucrative US shale gasmarket. BHP will pay $38.75 a share, giving the deala total value of $15.1 billion including Petrohawksdebt. "The proposed acquisition of Petrohawk isconsistent with our ... strategy and provides us witheven greater exposure to the worlds largest energymarket, while also broadening our geographic andcustomer spread," BHP chief executive MariusKloppers said. [Saudi Gazette/AFP]

Shareholders of Petrohawk (82% institutional) got a nice payday

SHARES HELD AT BUYOUT

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3/24

Insiders at Petrohawk had a nice payday, too

During the six months ended June 30,2011, Petrohawk granted stock optionscovering 2.3 million shares of commonstock to employees of the Company.[August 10-K]

The BHP all-cash offer represents a 65%premium to the Houston-based company'sclosing share price. [Dow Jones]

The key strategy message was that BHP Billiton is a natural owner oflarge, long-life, high-margin shale assets. BHP Billiton will be able tobring lower cost and faster funding for the development of Petrohawk'sshale gas assets in Texas and Louisiana. Exploration companies do nothave the same cost of capital as a diversified resource company like BHPBilliton. 'The ability to deploy the capital is the opportunity that we'relooking for here,' BHP Billiton's CEO said. [Ravi Madhavan]

MELBOURNE -(Dow Jones)- BHP Billiton Ltd's US$12.1 billion bid forPetrohawk Energy Corp. (HK) should be valued against the gas and oilassets in the ground rather than the U.S. shale gas company's shareprice, the chief executive of BHP said Friday.

Exploration companies in the oil and gas space attract higher takeovermultiples than established companies where "upside" is capped, MariusKloppers said during a conference call. Kloppers said he is confidentBHP can add value to Petrohawk due to the cost at which the Anglo-Australian company can raise funding and the speed it can develop theassets. The offer price recognizes the value of Petrohawk's opportunities,

and the deal is expected to be accretive to earnings per share in the firstfull year after completion, he said.

So, what's not to like?

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4/24

BHP Acquired a Financial Trainwreck

[Anand Chokkavelu, Motley Fool, Apr 8, 2011] Petrohawk has a P/Eratio of 39.3 and a negative EV/FCF [Enterprise Value to unlevered Free

Cash Flow] ratio over the trailing 12 months. If we stretch and comparecurrent valuations to the five-year averages for earnings and free cashflow, Petrohawk has negative P/E and EV/FCF ratios. A positive one-year ratio under 10 for both metrics is ideal. For a five-year metric,under 20 is ideal. Petrohawk is zero for four on hitting the targets.

[M&A Review] Charles Kernot, analyst at Evo Securities says: BHPBilliton would pay around $27 per boe for proved reserves, which isrelatively expensive.

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5/24

[M&A Review] According to Robert Morris and his crew from CitigroupGlobal Markets, the cost to BHP for undrilled Haynesville acreage isabout $5,000 per acre, which matches what BHP paid for Chesapeake'sFayetteville stake earlier this year. For Petrohawk's Permian acreage,

Citigroup estimated the cost to BHP was about $6,200 per acre, whichappears quite aggressive given that HK's average cost basis is $1,400per acre. And for the Eagle Ford acreage, Citigroup estimated the priceto be $22,000 per acre, which is arguably the high-end of any publictransaction to date.

BHP paid $27.00/boe for HK Reserves

XTO paid $11.50/boe for HK Reserves

[Eugene Kim, Drilling Info] Petrohawk Energy Corporation announcedon December 23rd that it has completed the sale of its natural gas assetsin the Fayetteville Shale to XTO Energy Inc. subsidiary of ExxonMobilfor $575 million. The Company has estimated that its Fayetteville Shaleassets have proved reserves of approximately 299 Bcf (50 million boe).

HK had to sell Fayetteville (cheap) to raise Cash

[David J. Phillips, 10Q Detective, Feb 2010] Petrohawk is nursing amighty hangover after awaking from a 2-year buying binge $5

billion spent on acquiring leasehold interests in the Haynesville Shale,Fayetteville Shale, and Eagle Ford Shale plays. Petrohawk is like theU.S. Treasury in some respects, having funded its expansive appetitewith paper common stock outstanding has almost doubled since2006 to 300 million shares and deficit spending: At September 30,long-term debt stood at approximately $2.4 billion, roughly 73 percentof stockholder equity.

Contractual obligations maturing on Petrohawks leveraged balance

sheet climb from $663 million in the next 12 months to approximately$1.9 billion in 2011 2012.The company has never thrown-off positivefree cash flow since being birthed by Wilson through a reverse merger ofsome long forgotten energy exploration shell back in 2003.

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6/24

It will be several years before we know whether the Petrohawkdeal was a strategic masterstroke or a costly blunder.[Ian Lyall]

Well, Petrohawk confidently affirms that everything will play out nicely,according to this financial presentation to BHP:

No idea what they mean by ROR. Two possibilities

ROR (Return on Total Capital) measures the income return of an incomeproducing property with the implicit assumption that there is no debt.

ROR (Return On Revenue) calculated as net income divided by revenue;increasing ROR implies less expensefor higher net income.

neither of which pertains to Petrohawk and if I'm reading their chartcorrectly, it claims that Haynesville Shale is profitable at $4/mcf, whichis most certainly not true and never was.

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7/24

[Robert Hutchinson, May 9, 2011] Petrohawk Energy released its firstquarter earnings report last week. As the company has been saying forthe past year, it expects to have the vast majority of its leasehold held byproduction in the second quarter of this year. As a result, it will start

reducing rig count in the next few months. The company has beenaveraging 16 Haynesville rigs, but that number will drop to six by thebeginning of the third quarter and hold until the end of the year.

When you step back to think about it, the company has produced 410billion cubic feet of natural gas in three years and has yet to break even.Economists would describe that as irrational. Running that many rigsdrilling $10 million wells in a crappy commodity price environment?

Petrohawk's reserve base is expensive to exploit, with averagewell costs in the vicinity of $10 million. [Stephen D. Simpson]

Nor is it simply a matter of drilling cost. Billions of dollars were spent tolease mineral rights or to buy them from others at a premium, to hire aprofessional engineering staff, and to build gathering infrastructure.

[Arthur E. Berman] When capital expenditures are added, it costs mostoperators about $7.50/Mcf to find, develop and operate in the play.While some operators are currently hedged at higher prices, this is ashort-term situation, and no one will take the other side of a hedge atmore than $7.50/Mcf today or at any time in the foreseeable future.

While shale play enthusiasts have claimed profitability at gasprices below $5/mcf in recent years, these half-cycle economics do

not include significant fixed and sunk costs such as debt serviceand overhead. With the flight to liquids-rich plays in recentmonths, the truth about true cost is being revealed.

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In a very real sense, it's inappropriate to pick on poor Petrohawk, whohas an enviable track record in drilling and completing exceptionallyproductive Haynesville Shale wells.

[Berman & Pittinger, 2011] Petrohawk results average 4.0 Bcf/well

and are substantially better than Chesapeake and Encana results,which average 2.4 and 2.6 Bcf/well respectively. The better resultsachieved by Petrohawk and Exco are probably because of their acreagepositions in the core area of Desoto, Red River and Bossier parishes.

That's the good news. Now the bad news.

The Haynesville play is unique among the shale gas plays because it ishighly over-pressured, ranging from 0.75-0.85 psi/ft. This overpressureresults in much higher initial rates than in other shale gas plays... As

pressures deplete, the pore pressure can no longer counteract thelithostatic gradient, hence fracture permeability is probably reduced asthe wells are depleted and fractures close, potentially explaining themuch steeper decline rates observed in this trend. [ibid]

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9/24

Shale Economics

One of the measures that Petrohawk has adopted, to grapple with verysteep rate of Haynesville decline (85% in the first 12 months) is to choke

the wells and produce more slowly, thereby extending the EstimatedUltimate Recovery (EUR) i.e., the total production of gas obtained overthe life of a single well or a portfolio of Haynesville wells.

Extending and pretending are related ideas.

[David J. Phillips, 10Q Detective, Feb 2010] PetrohawkEnergyconfidently predicts that the $5 billion spent onleasehold acquisitions and drilling projects (in just the lasttwo years) for promising U.S. shale plays will offer attractivelong-term production and profit growth potential for manyyears to come. A bad bet, say outside observers, arguing thatthe natural gas producers estimated reserves-to-productionratio of almost 16 years is not only overstated, but thatprojected shale gas numbers, known as estimated ultimaterecovery (EUR) rates, are rooted in untenable flow rates.

Petrohawk is currently operating 17 horizontal rigs in theHaynesville Shale, principally in Northwest Louisiana andEast Texas. Of the $1.45 billion drilling budget for 2010, $900million is being set aside for Haynesville, with plans to spudbetween 110 and 120 wells.

You will perhaps recall that Petrohawk changed their game plan andthat drilling to hold leases by production has trimmed the number ofHK Haynesville rigs from 17 to 6. But let's suppose they drill 120 wells,sooner or later. That's BHP's explicitly stated goal to deploy a pile ofAustralian cash and exploit Petrohawk's Haynesville asset.

120 wells + gas gathering infrastructure will cost $1.2 billion at today'sprices, ignoring company overheads, interest, and wellsite accidents.

120 wells @ 4 bcf x $5/mcf net = $2.4 billion (100% profit)

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10/24

Petrohawk's ROR chart predicted 100% Haynesville profit at $6.20/mcftaking into consideration overheads and an occasional blunder, but let'snot quibble over a buck or two. The question is whether to spend $1.2billion to earn $2.4 billion. Sounds pretty sensible until you consider

the hurdle rate, sometimes called the opportunity cost of money.

If those 120 wells suddenly sprang into existence tomorrow afternoonand produced 4 bcf instantly, you'd have 100% profit. But they can't.

A dollar today is worth more than $1 tomorrow.

A highly aggressive drilling program will take years to spud 120 wells.20 rigs each drilling 3 wells per year = 120 wells in 2 years. The firstwell drilled and completed produces 4 bcf cumulatively in the 4th year.The last well drilled delivers a profit in year Six assuming that everywell is equally productive(the manufacturing model).

It doesn't make sense to undertake unless netback is > $5/mcf.

Nor is it likely that all 120 wells will be mechanically sound. Petrohawksuccessfully completed only 38 out of its first 44 Haynesville wells.

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11/24

Supply and Demand

Okay, let's suppose that the 120 new wells are 80% successful andproduce an average of 4 bcf each over six years, without any mishaps,

shortages of rigs or skilled drilling crews, changes in hydrofrackingrules, or cost overruns. At $8/mcf the plan is bulletproof, right?

Uh, no. Not quite.

Petrohawk does not have a monopoly on natural gas production.

U.S. Natural Gas Production

in million cubic feet per day (mmcfd)

Jan.-June 2009

1. BP 2,3372. Anadarko Petroleum 2,325

3. XTO Energy 2,290

4. Chesapeake Energy 2,210

5. Devon Energy 2,130

6. ConocoPhillips 2,108

7. Encana Corp 1,663

8. Chevron Corp 1,387

9. ExxonMobil Corp 1,243

10. Williams Cos Inc 1,202

No matter how much BHP boodle they burn, Petrohawk is destined to

remain a minnow among hungry killer whales like Chesapeake, Devon,and XTO. Natural gas is a commodity supplied in ever-increasing glutfrom conventional reservoirs and shales across the country.

The upside for everyone is growing demand, but...

Natural gas price projections are significantly lower thanpast years due to an expanded shale gas resource base.

[Richard Newell, EIA]

Supply will continue to outpace demand, and America's domestic gasglut is a long-term death threat for high-cost shale operators.

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It is really very simple: how much did you spend, how much haveyou got out and how much are you getting out each day, using notgross amounts but net amounts. Projections are where all thefalsehoods hide. Four 10% errors in a row give a 60% of projectionresult. [Doug Proctor]

Investors voted with their feet when BHP's acquistion of Petrohawk wasannounced. Paying a 65% premium for shale assets didn't make sense.

Nor is Petrohawk's claim of 22 tcf risked resource a fair assessment.Petrohawk proved reserves are 3.4 tcfe all assets including EagleFord, Permian Basin and Haynesville Shale*

Total Haynesville Shale basin EUR may be as low as 30 tcf and intrepidlittle Petrohawk owns a small fraction of that risked resource. TheirHaynesville play has never yielded a profit in the past and might neverreturn a profit in the future, no matter how many wells they operate.

* HK proved reserves are ~80% proved undeveloped which are vapor in shale plays, so even theNetherland Sewell certified 3.4 tcf is inflated. Petrohawk's proved producing number may be 0.7 tcf,most of which is SEC non-commercial and will have to be written off as impairments by BHP. The

brilliance of the transaction from HK's perspective is that, under the revised SEC rules, PUDs must be

drilled in 5 years to remain booked. HK doesn't have to deliver but got to count them as valuation.

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13/24

Will Eagle Ford Liquids Save BHP's Bacon?

(Petrohawk leaseholds are the 3 white dots)

Every good story should have a happy ending. Unfortunately, Petrohawkis not one of those happy smilie kid adventures where everyone wins.

[Robert Hutchinson] In the beginning, Petrohawks focus was onnatural gas in the Eagle Ford. Based on seismic surveys and well logsthey began acquiring what appeared to be the best acreage prospectivefor natural gas.

EOG Resources began to stealthily lease up all of the 'wet' Eagle Ford

shale acreage that they could get their hands on, much of it at pricesunder $500 per acre. EOG Resources soon overtook Petrohawk as thelargest leaseholder in the Eagle Ford shale and became the biggestliquids producer. EOG Resources has estimated over 900,000 barrels ofrecoverable oil (net after royalty) in the 550,000 acres they hold in theoil and condensate windows.

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Horizontal wells with long laterals are $10 million a pop in the EagleFord, and if you aren't within spitting distance of a pipeline, 'wet' gascontaining small amounts of liquid condensate isn't worth drilling.

Petrohawk is in the worst possible position: 90% dry gas.

Red Hawk field initial oil production averaging 375 barrelsper day. The company claims EUR of 500-750 Mboe. "It isinteresting to note that Petrohawk describes these liquids ascondensate and not oil." [Drilling Info.com, Mar 2010]

Compare other Eagle Ford operators:

EOG Resources: 520,000 acres in mature oil window, 26,000 acres inwet gas window and 49,000 wet gas. Total: 590,000 acres.

Chesapeake Energy: (partner CNOOC) 445,000 acres.

Newfield Exploration: (85% working interest), 335,000 acres.

Apache Corporation: 450,000 acres mixed oil and gas windows.

Pioneer Natural Resources: 310,000 acres.

Anadarko Petroleum: 300,000 acres.

ConocoPhillips: 300,000 + acres.

St. Marys Land And Exploration: 250,000 acres. Consists of 165,000acres, 100% working interest in wet gas window and 85,000 acres inwet gas and oil windows, JV with Anadarko.

The Eagle Ford play is not a cake walk. I reproduce below professionalassessment by petroleum geologists in The Oil Drum, August 2011

[Rockman] I've been tracking the Eagle Ford production. As you knowit takes 2 to 3 years to get enough decline rate to be able to make anaccurate projection. There are just a small number (around 20) of Eagle

Ford wells with enough history to make a valid argument at this timeIMHO. But in the next year or two we'll have at lot more wells toanalyze...

(continued next page)

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In the meantime all I can do is point out some obvious BS companiesput out. One company brought an Eagle Ford well on at 947 BOPD andproduced 181,000 bo in the first 12 months. They bragged about thiswell and offered that it MIGHT recover 500,000 bo. But in their pressrelease they neglected to mention that the well declined from 947 bopd

to 86 bopd in that one year. Yes ... a 90% decline rate. So averagingaround 500 bopd it made 181,000 bo and they say it MIGHT produce ananother 320,000 in the future while averaging much less than 90 bopd.They are certainly free to express their OPINION. But opinions vary.

[abundance concept] So, if they keep the thing active for another 30years, that's 320,000 / 30 years / 365 days = 29.2 bpd average over30 years. Why is that unreasonable?

[Rockman] And if they keep producing 500 years they'll recover over

5 million bbls of oil? ...In the Eagle Ford shale it appears most of thosewells will go on gas lift within the first 18 months of their life, then oncesolution gas is dissipated those wells will have to go on rod lift. Onceyou begin producing 9000 foot horizontal wells on rod lift, the patienthas been diagnosed with cancer, it's just a matter of how long it's got tolive. That rod lift well will reach economic limits for medium sizedindependents at around 12 BOPD, 8 BOPD net after royalty deducts,assuming $75 oil, if they don't make water. If they make water the netBOPD must be more lots more depending on how much water theymake. So at some point in the decline those wells reach economic limitsand they die a premature death, long before the ripe old age of 30. Add

in a multitude of unknowns like lateral collapse and re-fracs, casingfailure, falling oil prices, inflationary increases in the incremental liftcost per barrel, disposal costs, regulatory/environmental costs in thenext 15 years, changes in tax laws; these shale wells down here in Texaswon't live to be teenagers, much less young adults. The EUR's they arethrowing at us in my opinion are bunk.

[pittsburghsteelers] In general I would agree with you that the EagleFord is over-hyped. For instance, North Dimmit Co has some of thepoorest well results, yet leases are going for $10,000/acre with wells

IP'ing at


16/24

[Bob DeLong] One of the advantages of owning small E&P is thatoccasionally a rich bunch of ignorant fat cats will pay a ridiculouspremium for your stock. But shareholders lose, because they could havebought the stock themselves without paying the premium. And ofcourse, there is no synergy. In fact, the opposite is true. If E&Ps are

worth a huge premium, why arent cash rich integrated oils like COP,HESS, OXY (just to name a few) devouring the E&Ps? Certainly thesefirms are better able to value E&Ps than some miners from the otherside of the world. Youve seen the maps. These integrated firms haveacreage interspersed with that of the E&Ps. They have the best idea ofwhat the E&Ps are worth. Announcement of the BHP-HK merger createda temporary bubble, thats all. Fools rushed into our industry.

Magical Thinking: Shale Gas = Oil

BHP is not alone in fudging the value of shale gas assets.

ExxonMobil's acquisition of XTO Energy inspired a 100 billion dollarscramble for US shale ventures and acquisitions by Reliance (India),CNOOC (China), Total (France), BG Group (UK), Statoil (Norway), RoyalDutch Shell (UK-NL), BP (UK), Talisman (Canada), Mitsui (Japan) andUS stalwarts Chevron, Anadarko and ConocoPhillips.

Why? reserves.

[Berman] Reserve replacement has been a challenge formajor oil companies for at least the last decade asopportunities in the international arena havecontracted. North American shale gas plays offer atemporary solution. Whether big companies can findoperational and technological ways to make these playscommercial is another question but, for the short term,shale plays provide a means to add reserves.

SEC and IASB rules allow oil companies to book gas reserves as oilequivalent (boe) on the thermal basis of 6 mcf gas = 1 bbl of crude.

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That oil companies are unable to replace declining oil reserves with newoil reservesis a well-known, intractable problem.

That's why we are witnessing lunatic deals in Iraq ($1 per barrel fee forincreased production), in Brazil ($300 billion to explore pre-salt), inKazakhstan ($120 billion wasted at Kashagan), in Nigeria (Shell pulledout), and in Russia (too many deals blown up to name individually).

Exxon's acquisition of XTO was a template. Shale's risked resourcesare huge. SEC revision of Rules S-K and S-X in 2009 allowed blue skyshale reserves to be reported by public companies as barrels of oil(boe)in a comingled portfolio of oil and gas assets.

Equivalence of oil and gas is completely fake and everyone in the oilindustry understands that boe(or worse: tcfe stating oil and NGL asgas volumes) is a game designed to flummox retail investors.

Think about it. 6 mcf of natural gas fetches about $23 at the wellhead.A barrel of light sweet West Texas Intermediate is worth $85. A barrel ofBrent is $105. Natural gas cannot power an airplane, a bulldozer, orhundreds of millions of cars, trucks and tractors that use liquid fuel.

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18/24

Less Government, More Creative Destruction

American economist Joseph Schumpeter, champion

of innovation and free market creative destructionwould be appalled at our lack of progress in the21st century energy industry.

Instead of going forward, we're going backward withdeployment of capital and value for money.

By allowing oil companies to book shale gas reserves as oil equivalentand paying a premium for shale operators who cannot make a profit,

we're sustaining Business As Usual in the oil patch. I use that termadvisedly to denote the corrupt practice of milking investors, inflatingthe value of recoverable reserves, and masquerading as advocates ofPolitically Correct, hopelessly inefficient green technologies.

The cost of such self-serving, callow PR is measured in hundreds ofbillions of dollars wasted on net energy negative Corn Ethanol subsidyand inherently silly Gas-To-Liquids and Blue Green Algae projects.

I don't know which is worse: BP executives, an Offshore InstallationManager, and a Senior Toolpusher who were patting themselves on theback with safety awardsand playing video games on the evening whenMacondo exploded, killing all 11 men on the drilling floor or Obama'sknee-jerk response that penalized Exxon, Chevron, Marathon, Shell,and thousands of offshore service workers who had absolutely nothingto do with Deepwater Horizon. If it wasn't for the heroism of a serviceboat crew, the number of Macondo survivors would have been zero.

If the oil industry is to survive and thrive, the mind numbing delusionsof safety-by-paperwork and see-no-evil reserves valuation must end. Afree market does not reward failures like Petrohawk, absent a hystericalgovernment sponsored climate change meme to mandate destructionof coal-fired electric power generation and diesel road transport.

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Concluding Remarks

No one is suggesting that shale oil and gas are unnecessary or unwiseinvestments. Bakken structural traps were commercially successful.

It is less clear whether big operators like Chesapeake will ever make aprofit in uneconomic (Barnett) or conjectural plays (Bossier, Utica).

At $4/mcf, Petrohawk is a dead enterprise.

Artificially lifting the price of natural gas by government subsidy (ThePickens Plan) or mandating closure of US coal-fired power plants iswhat leveraged investment banks and Big Oil are praying for. Insiderscan cash out and retire wealthy consumer prices, energy security,and spiraling government deficit spending be damned.

America is best served by a free market with minimal regulation and

more transparency on the balance sheets of oil companies. 6 mcf doesnot equal 1 boe and resources base is precisely what BHP Billitoncalled them in the attached pages of the Appendix not proved, notprobable, not possible, and strictly forbidden by SEC rules.

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Disclosure: No position long or short in energy or any of the companies discussed. Contenttaken from public websites is "fair use" for critical and educational purposes. No financial,legal or accounting advice is offered in this article, nor any representation that the informationpresented is accurate, timely, or complete. The opinions expressed here are solely those ofthe author and do not reflect the views of CWSX LLC or its professional staff or directors.

Appendix

July 14 merger PowerPoint disclaimer

BHP Billiton uses the term non-proved resources base" in thispresentation to refer to reserves other than proved, probable or possiblereserves, which the SEC's guidelines strictly prohibit us from includingin filings with the SEC... This term includes estimates which are not yetclassified as proved, probable or possible reserves. These estimates areby their nature more speculative than estimates of proved, probable andpossible reserves and accordingly are subject to substantially greaterrisk of being actually realized.

(In other words, complete monkey crap.)

August 2011 Petrohawk 10Q

Stockholders' equity: $304,000

Net increase in cash: $64,000

Long Term Debt: $3,766,380,000


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Petrohawk merger disclaimer

...actual results to differ from those anticipated in the forward-looking

statements, including, but not limited to, the following factors:

our ability to successfully develop our large inventory of undevelopedacreage in our resource plays such as the Haynesville, Lower Bossier,and Eagle Ford Shales;

volatility in commodity prices for oil and natural gas;

the possibility that our industry may be subject to future regulatory orlegislative actions (including any additional taxes and changes inenvironmental regulation);

the presence or recoverability of estimated oil and natural gas reservesand the actual future production rates and associated costs;

the potential for production decline rates for our wells to be greaterthan we expect;

our ability to generate sufficient cash flow from operations, borrowings

or other sources to enable us to fully develop our undeveloped acreagepositions;

our ability to replace oil and natural gas reserves;

environmental risks;

drilling and operating risks;

exploration and development risks;

competition, including competition for acreage in resource play areas;


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Petrohawk merger disclaimer cont'd

management's ability to execute our plans to meet our goals;

our ability to retain key members of senior management and keytechnical employees especially given the pending merger with affiliatesof BHP Billiton Limited;

the cost and availability of goods and services, such as drilling rigs,fracture stimulation services and tubulars;

access to and availability of water and other treatment materials tocarry out planned fracture stimulations in our resource plays;

access to adequate gathering systems and transportation take-awaycapacity, necessary to fully execute our capital program; business,operations and financial results;

general economic conditions, whether internationally, nationally or inthe regional and local market areas in which we do business, may beless favorable than expected, including the possibility that the economicconditions in the United States will worsen and that capital markets are

disrupted, which could adversely affect demand for oil and natural gasand make it difficult to access financial markets;

social unrest, political instability, armed conflict, or acts of terrorismor sabotage in oil and natural gas producing regions...

other economic, competitive, governmental, legislative, regulatory,geopolitical and technological factors that may negatively impact ourbusiness, operations or pricing.

(In other words, ignore everything we said about assets, opportunities,co-operation with BHP and our competence to run an oil company.)

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BHP Investor and Analyst BriefingMonday 24 May 2010

J. Michael (Mike) Yeager, CEO, BHP Billiton Petroleum.

Centralized management

Everything that were going to do, everything that we - of what were going to do, all of ourplanning, all of our financial analyses, all the things that involve what were going to do tomorroware centralised probably deeper than most companies...

Worldwide BHP standards, no exceptions

Its all built on functional excellence at being very, very strong down the different aspects of ourbusiness. In our countries, and you can see the places around the world that we operate, we havelarge stand alone strong operating units.... Theyre not out there writing their own policies. Theyrenot out there deciding what the metrics are going to be for this year.. They accept and receiveservices from the centre in a common way, and they adhere to world wide standards...

Extremely proud to be 73% in liquids...weve had volume growth with liquids. We have volume growth in US gas right now. Youregetting about $4 per MMBTU. You convert that to a barrel by multiplying that times six, so yourrevenue in the US right now if youre in the gas business would be around $25 a barrel. Youre inthe liquids business, its $70 or $80 a barrel, as you can see. So ours are primarily liquidsgrowth... combined with low cash and low operating costs, gives us the margin that Ivedescribed that were extremely proud of...

$2 billion for Western Australia

Our proven reserves, which are listed on the left-hand side there, about 1.4 billion barrels, oraround eight to 10 years of future production, we have in the proved category. But that pales, asyou can see, in comparison to about two and a half billion barrels that are already discovered,already there, not speculative, but just do not have funding behind them yet... In FY11 we will startspending on that in a capital nature, and as you can see, raise those expenditures by 2015 toover two to two and a half billion dollars a year. So these are large projects that are enormous,and clearly now moving into our longer-range view...

Q: Merger or acquisition prospects?

We do have some people that would explore that and it brings us back, of course, to the mostvaluable thing that I feel we have; not only being part of a great corporation, but the balance sheetwe have... Having said that, our primary mission will always be through the drill bit, through thedrill bit, through the drill bit. Thats how you get those low costs. Thats how you get those greatreturns...


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Q: (Stuart Baker, Morgan Stanley)

Just a question on strategy regarding gas. Some years ago, BHP was the reasonably activeunconventional stuff here, coal steam and I think also in China, and didnt take that forward, andnow weve seen the unconventional gas in quite a few countries, such as the US, fundamentallyshift the dynamics in the gas industry... So just wondering what BHPs thinking is, in terms of

unconventional gas? It doesnt seem to be featuring much at this point.

A: 'We have our hands full with larger things'

Well, Stuart, thanks for bringing that up. As most of you are familiar, you know, in the last five orso years, particularly in North America, the idea of the unconventional gas in the shales has nowtaken a big technological leap. Where the wells can now be drilled down and drilled horizontally,they can be fractured and we can get commercial amounts of gas from rock that for the entireprevious history, the oil and gas business was too tight and too trashy to give you commercialdiscoveries. This phenomenon has advanced so much that now, literally, North America is self-sufficient in natural gas, so much so that theres gas-on-gas competition, and the consumer is

now enjoying the lowest prices of natural gas that theyve had in quite some time, down aroundUS$4 per million BTU...

So I will say this, Stuart: you know, were not in that right now. Weve had our hands full in thelarger things... We do want to diversify by geography. We do want to have a safer set of cashflows going forward, but were also a conservative company, if you will, in the discipline side, andwe dont jump into things that we dont understand...

But were open minded, and its because of the diversification part of our strategy. Its just how wedo that and how we make sure the business is strong and healthy. And right now, for the nextseveral years, that US gas business could be a bit soft, because of the oversupplied nature of itand the low prices that are being realised. It gives me a chance to make the comparison, guys I

hope you can see at $4 per million BTU, if youre exclusively in that US gas business, to convertthat to a barrel you multiply it by six. So youre talking about a $24 or $25 dollar revenue barrel... Alot of those companies have low revenues, have higher debt.

Q: (Mark Busuttil, UBS)

Real simple question: can you give us an idea of what your capex and exploration budgets are forthis year and next?

A: 'Not more than $2 billion a year capex"

Sure, Mark. As I mentioned, this year well spend about $800 million in exploration, and a littleover $2 billion in major project capital on all the things weve described. Next year, I would saythat, although its not released and the board has not endorsed that, I dont think you could expectbig movements from those numbers...

(shorter version: $4/mcf sucks, no plan to enter shale business.)

24

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