When Reliance Industries Ltd (RIL) made its first acquisition in the shale gas space, it had seemed like it had overpaid to some extent. Shares of Atlas Energy Inc., which sold Reliance a stake in its shale gas assets, rose by 20% soon after the deal.
There’s no such luck for investors of Pioneer Natural Resources Co., which has sold a stake in its Eagle Ford shale assets to RIL. The company’s shares have been flat since the deal was announced.
Also See Price Tag (Graphic)
In terms of the per acre valuation of the deal, RIL will be paying around 20% less compared with what it did for the Marcellus shale assets. It will have a 45% stake in the joint venture and would pay a total consideration of $1.315 billion (Rs6,075 crore) for its implied share of 118,000 acre.
This translates into a valuation of $11,144 an acre. In April, when RIL entered into a joint venture with Atlas Energy for a 40% interest in the Marcellus shale formation, the deal valuation was around $14,000 per acre.
The structure of both the deals is similar. RIL would make an upfront payment of $263 million in the Pioneer deal, and will contribute up to $1.05 billion towards drilling costs. In the Atlas deal, it made an upfront payment of $340 million and agreed to contribute up to $1.36 billion towards drilling costs.
According to analysts, the Pioneer deal worked out cheaper for two reasons. One, Pioneer would be in need of cash, given that it posted net loss of $245.25 million for the March quarter. Secondly, an increasing supply of natural gas in the US has adversely hit gas prices.
A JPMorgan report on the deal states that the deal valuation is at a 12% discount compared with the implied value of the Eagle Ford shale asset, using a long-term gas price assumption of $6.8 per mmBtu (million British thermal unit). Besides, while Pioneer will be the operator, RIL has the option to operate parts of the acreage; this will give it added experience in this new field.
While the deal seems positive for RIL from a valuation perspective, the benefits from the deal will accrue only in the long term. This is perhaps why the stock didn’t react much after the announcement.
On Thursday, RIL fell by 0.6% on the Bombay Stock Exchange on a day when the benchmark Sensex index declined 0.14%.
Graphic by Yogesh Kumar/Mint
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