Sydney/Perth: Top global miner BHP Billiton will buy US gas producer Petrohawk Energy Corp for $12.1 billion, ramping up its bets on the booming but environmentally controversial shale gas industry.

The agreed all-cash deal is pitched at a 65% premium to Petrohawk last-traded share price, and follows BHP’s $4.75 billion purchase of Chesapeake Energy’s interest in an Arkansas shale gas field in February.

Peter Chilton, portfolio manager at Constellation Capital Management, said he believed BHP felt secure about the premium being paid and was positioning itself for a US economic rebound.

“Their view on their first shale buy was they were buying at bottom-of-the-cycle prices. I guess they see value here," he said. “With oil prices where they are, it’s pretty hard to find opportunities that are not fully priced."

BHP, known as “The Big Australian" has run into repeated regulatory hurdles with deals in its mining operations and its $39 billion bid for Canada’s Potash Corp was stymied by regulators last year.

CEO Marius Kloppers said the company was “very highly" likely to be involved in further consolidation in the petroleum industry.

Cash goes to work

BHP will use its abundant cash reserves to fund the deal, which comes at time when companies are looking to snap up raw materials to fuel strong demand from emerging markets.

This week alone, $24.9 billion worth of Asia resource-related deals have been announced, according to Thomson Reuters data.

BHP said that once the Petrohawk deal was completed, it embark on aggressive spending of more than $40 billion over the next decade to develop Petrohawk’s three major fields, all in the “sweet spot" for shale gas in the southern United States.

“This transaction will have extremely strong returns and development potential for a very, very long time," BHP’s petroleum chief, J. Michael Yeager, told a briefing, adding it could more than double the division’s existing resource base.

The acquisition gives BHP a risked resource base of 35 trillion cubic feet equivalent, the firm said, adding there was a break fee in the deal of $395 million.

Petrohawk shares last closed at $23.49 compared with the $38.75 offer price. BHP shares fell 2% to A$42.76, lagging the broader market, with some analysts now questioning its ability to continue fund more multi-billion-dollar share buybacks.

BHP chief executive Marius Kloppers would not be drawn on this issue. “I don’t want to rule in or rule out additional buy-backs...," he told the briefing.

But Perpetual fund manager James Bruce said the Petrohawk deal should not halt more capital returns. “This is a company with significant cash flows and there are options for the board to increase the dividend and/or announce another buyback."

Huge potential vs Environmental concerns

Petrohawk’s assets cover about 1 million net acres in Texas and Louisiana, with estimated 2011 net production of around 950 million cubic feet equivalent per day, or 158,000 barrels of oil equivalent per day.

BHP is targeting shale gas as it emerges as a major source of cleaner-burning fuel in a world increasingly looking for alternatives to coal-fired energy. Gas produces about half the emissions of coal when burnt to make electricity, BHP said.

“If the whole continent of Australia used electricity sourced from natural gas...this thing we purchased would supply that need for 18 years," said BHP’s Yeager, illustrating the resource base to a briefing of mostly Australian analysts.

The International Energy Agency has said around 40% of the increase in global gas production between now and 2035 will come from unconventional gas exploration, such as fracking shale gas or coalbed methane gas, also known as coal seam gas.

BHP estimated shale gas would account for half of total the US gas market by 2030 and also noted shale gas can provide returns in months, compared with the five years or more of development required to bring offshore oil and gas on stream.

But shale gas is also beset by environmental concerns.

Since March 2010, the US Environmental Protection Agency and other federal agencies have been reviewing the environmental and health impact of shale gas drilling, which could mean new regulations on the sector.

In April, a blowout of a natural gas well in Pennsylvania spewed thousands of gallons of drilling fluid that contaminated local waterways and intensified debate over a shale drilling method called hydraulic fracturing or “fracking."

New BHP strategy

In targeting shale gas, BHP is biting off smaller deals than the blockbuster takeovers it has tried and failed to secure over the past three years, including the Potash Corp bid.

Early in his tenure as BHP CEO Kloppers also launched an audacious but ultimately mistimed play for rival Rio Tinto just before the global credit crisis in 2008. He later attempted a $116 billion merger of BHP and rival Rio Tinto’s iron ore businesses, but that too failed.

In the latest deal, BHP is advised by Barclays Capital and Scotia Waterous, and Petrohawk is advised by Goldman Sachs.