Diary of a Financier

Sickness: Petrohawk to Be Acquired by BHP Billiton

In Idiosyncrasy on Fri 15 Jul 2011 at 08:41
  • BHP acquiring HK at 65% premium.
  • I’m sick because I’ve traded HK famously over the past years & I was waiting for a takeover, but I was on the sidelines for this announcement.
  • I have to learn something from this (not sure what yet).

Just a very quick, emotional note. I got out of the shower at the gym last night around 9pm, then I took a seat in the lockerroom to relax for a moment before getting dressed and running home. While I sat, I scrolled Bloomberg on my iPhone as always, checking international markets, futures, and news. That’s when I saw the headline:

BHP Billiton

to Acquire Petrohawk

for $12.1B

Sickness.

In the entire scrolling page of headlines, that name, “Petrohawk,” grabbed my eye. It’s like the cocktail party effect–when you’re at a loud, crowded cocktail party and someone across the room utters your name in natural conversation, yet it still catches your ear.

I’ve had two very profitable rides with long positions in Petrohawk (HK). Recall an entry from May 26:

I rode the Natural Gas ETF (UNG) for its most volatile swings at the end of 2010. After closing out my position with a thin gain, I decided to sit with Petrohawk (HK) as a better medium of Natural Gas (NG/1) exposure in 1q2011. This was my second round with HK, and in no time I had my second big gain in it as it quickly rapped my $26.75 target. I’ll keep watching HK, because some big player will swoop in to buy them out, but it was really just my NG bastion while I waited for physical NG to prep for an ultimate rally… and I took a position in UNG at $11.20.

So I sold HK at its peak, as mentioned therein. HK is -12% since I closed that last gain in May, not to mention that the UNG position subsequently netted me +8.4%. (I’m back into UNG too, since it’s pulled back and built a nice base, from which the weekly fractal looks to rally.)

As is emboldened above, I was tracking HK daily still, because I expected them to shop themselves to a suitor. Their assets are among the most valuable in the space, blah blah blah. HK’s chart had just started to confirm a new short-term bull cycle. I probably wouldn’t have pounced on it until the intermediate-term reversed to a bullish trend, to be honest. Regardless, I won’t have another opportunity, because BHP Billiton (BHP) snatched up the whole thing at a 65% premium to last night’s close.

I’ve actually missed a few M&A plays this year. I was particularly salty about Lubrizol (LZ), which Warren Buffet’s Berkshire Hathaway grabbed before I could. Having thrown myself at their books, I put LZ on a shortlist as a brilliant value play. I’ve had a long love affair with HK though, so I won’t soon forget the sick-feeling of an opportunity lost. I want to appeal to some stock market deity, because I feel like I deserve part of the 65% upside; I know I don’t though, since I chose to trade it instead of invest.

It’s finance’s version of missing your kid’s first walking steps. The story from Bloomberg:

BHP Billiton Ltd. (BHP), the world’s largest mining company, agreed to buy Petrohawk Energy Corp. (HK) for about $12.1 billion in cash in its biggest acquisition, betting natural gas demand will gain in the U.S.

BHP will pay $38.75 a share using cash and debt, the companies said in a statement today. That’s 61 percent more than Houston-based Petrohawk’s average price over the past 20 trading days and compares with the 25 percent average premium in 17 deals worth at least $5 billion for oil and gas producers in the past five years…

The premium is “probably a little bit more than expected,” Cameron Peacock, a market analyst at IG Markets Ltd. in Melbourne, said by phone. Paying in advance for future growth “is something the analysts often don’t like to see,” he said…

Petrohawk held 3.4 trillion cubic feet of reserves at the end of 2010. It produced 825 million cubic feet of gas as of March this year, of which 10 percent was in the form of liquids such as oil. The company expects to produce 950 million cubic feet of gas a day this year, with liquids accounting for 15 percent of output, according to its website.

I might actually feel as bad about missing this trade as I do when I eat $hit on a big loser. I cut most of my losers short, so the opportunity cost of missing 65% in HK (65%) is perhaps more of a loss than getting shredded with realized losses. I’ve noticed something about myself over the past three years: I’m motivated more by victory than by profit. Maybe that’s the competitive spirit of the athlete in me. I worked hard for HK, so it hurts to strike out looking. I’ll step up to the plate for my next at bat though. I’ll probably be better for it too. I’m sure there’s a lesson in this somewhere, and tonight I’ll have to comb the charts to look for signals I might have missed.

Sickness.

–Romeo

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