Mumbai: Reliance Industries Ltd (RIL) has agreed to pay $1.7 billion (Rs7,548 crore) to get into a joint venture (JV) with Atlas Energy Inc., a deal that will give India’s largest private sector firm access to natural gas assets in the US and a global foothold at a time when it seeks to use its growing cash hoard to nurture new sources of revenue and profit growth.
RIL, through a subsidiary Reliance Marcellus Llc, will get a 40% share of the JV that will make it a part owner of Atlas Energy’s Marcellus shale assets, or natural gas that is trapped within marine sedimentary rock layers and is considered to be a promising new source of hydrocarbons. The net potential of the Marcellus fields in Pennsylvania is approximately 13.3 trillion cu. ft equivalent (tcfe) of natural gas, with RIL having a claim of over 5.3 tcfe. RIL’s KG D6 gas field on India’s eastern coast has an estimated potential of 11 tcfe.
The Mukesh Ambani-led firm will have to invest another $3.4 billion as its share of development costs over the next 10 years, said RIL executive director P.M.S. Prasad. The company hopes to close the deal by the month-end.
“From a strategic perspective, it is a positive move and in the right direction. We prefer an upstream asset to a downstream one. Plus, this is getting them into a new unconventional energy source,” said Deepak Pareek, analyst with Mumbai-based Angel Broking Ltd, adding that financially, however, this was “a completely new ball game”, and he was still figuring out how to value it.
Another analyst highlighted the fact that RIL will get access to technology through this JV.
“Even with a minority stake, this will enable RIL to learn the ropes of a new technology and then apply it elsewhere,” said a Mumbai-based analyst with a foreign brokerage, who did not want to be named. India has not yet auctioned any blocks for shale gas development.
The JV comes soon after both of RIL’s global acquisition bids failed in the last couple of months. Its $14.5 billion buyout bid for bankrupt Dutch chemical maker LyondellBasell Industries AF ran into stiff resistance from the target’s management and a section of its creditors, and eventually fell through. RIL also lost a race for Canadian oil sands firm Value Creation Inc. to BP Plc, despite offering $2 billion for a majority stake.
RIL will be paying $339 million after the deal closes and an additional $1.36 billion to fund nearly three-quarters of Atlas’ capital cost over their five-year development plan, according to an RIL statement. In return, it gets to “partner in approximately 300,000 net acres of undeveloped leasehold in the core area of Marcellus Shale in southwestern Pennsylvania”, retains “the option to acquire 40% share in all new acreages” and “obtains the right of first offer with respect to potential future sales by Atlas of around 280,000 additional Appalachian acres currently controlled by Atlas” at $8,000 per acre. Low operating costs and proximity to US’ northern gas markets adds to the attractiveness of the deal.
Prasad said this “joint venture will materially increase RIL’s resources base and provide it with an entirely new platform” to grow its exploration business. Atlas, which reduces costs and monetized its assets with this deal, will be the development partner for the JV, but RIL will also begin to do so in later years.
Barclays Capital Inc. acted as the exclusive financial adviser to RIL. Vinson and Elkins Llp were the legal counsel and Bank of America-Merrill Lynch provided strategic and financial advice. RIL’s shares rose 1.78% to Rs1,123.95 a piece on the Bombay Stock Exchange, outstripping the rise in the Sensex, which rose 1.23%. The deal was announced after the market closed for the week.