India’s largest gas transportation and marketing firm, GAIL (India) Ltd, acquired its first shale gas asset last week in the US. The company will acquire 20% stake in the Eagle Ford shale acreage of Carrizo Oil and Gas Inc. for $95 million (around Rs 467.4 crore today) for 4,040 net acres. Over the next five years, the total investment is expected to be $300 million.
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On the face of it, the valuation for the deal looks relatively expensive. For instance, when Reliance Industries Ltd bought a stake in Eagle Ford shale assets in June last year, it paid $11,144 an acre. In comparison, GAIL’s valuation works out to about $23,515 an acre. While that shows a huge disparity, some analysts reckon that a cost comparison on a per acre basis may not reflect a fair picture.
“We note that a per acre-based cost comparison may not be most appropriate due to heterogeneity in shale gas plays and different production profiles, etc.,” wrote analysts from the Royal Bank of Scotland in a note on 29 September.
Given the small size of the deal, most analysts believe that it is unlikely to have a significant impact on GAIL’s valuations. “GAIL has cash balances of $430 million and operating cashflows of about $1 billion, so we think the foray into shale gas is unlikely to have a material impact on GAIL valuations (market capitalization is $11 billion), even though we believe the acquisition will be marginally accretive in FY13E,” pointed out analysts from JPMorgan in their report last week.
GAIL’s shares have fallen a bit since this deal has been announced. Since the beginning of this fiscal, the stock has declined by 12% to Rs 410. That looks good compared with the Sensex’s 18.4% drop during the same period.
While analysts feel that the downsides for the stock are limited from these levels, near-term upsides, too, appear limited. The company is in the process of expanding its gas transmission pipeline to 14,000km in the next few years. A key concern surrounding the stock is the capacity under-utilization of its new pipelines, given the shortage of gas supply. The company’s gas transmission volume growth, too, is expected to taper because of inadequate gas supplies. Lastly, shares of GAIL are also weighed down by subsidy issues.