RIL acquires Pioneer stake for $1.32 bn

RIL acquires Pioneer stake for $1.32 bn

Mumbai: Reliance Industries Ltd (RIL), India’s most valuable company, has picked up a 45% stake in Texas, US-based Pioneer Natural Resources Co. for $1.32 billion (around Rs6,100 crore)—its second such acquisition of shale gas assets in the country in less than three months.

Bloomberg first reported the deal last fortnight and the Financial Times did so earlier this week.

Analysts see the acquisition as part of a learning process for the oil-to-yarn and consumer retail company that will allow it to master a new and unconventional technology which has opened up, in the US, prolific gas reservoirs trapped in between rock layers, and has the potential to be replicated in India. In April, RIL acquired a stake in another US firm with shale gas assets.

The acquisition didn’t enthuse investors, though. Shares of RIL closed 0.69% lower at Rs1,051.30 each on Thursday on the Bombay Stock Exchange. And the exchange’s benchmark Sensex index fell 0.14% to 17,730.24 points.

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RIL’s executive director P.M.S. Prasad called the purchase in Eagle Ford Shale acreage a “significant milestone in Reliance’s efforts to grow its North American shale gas operations", echoing what chairman Mukesh Ambani had told RIL shareholders at the annual general meeting a week ago.

Ambani had said then that RIL “will continue to pursue such joint development opportunities with the best operators as well as our own to build a substantial upstream business in North America" besides committing “capital alongside low cost operators" to develop these assets.

RIL will pay Pioneer $263 million as an upfront payment for the stake and invest the remaining money as capital cost for developing the gas field over an anticipated period of four years.

In April, RIL took a 40% stake in Atlas Energy Inc.’s core Marcellus shale acreage position in the US for $1.7billion (again, $339 million as an upfront payment and the rest towards developing the field over an expected period of five years) , giving it access to at least 13 trillion cu. ft (tcf) of gas.

“It could be RIL’s strategy to become an investor in a company that has a local operator to learn about the shale gas business and presumably get access to technology at a later stage," said Arvind Mahajan, consulting firm KPMG’s head of energy and natural resource practice, adding that any technology accessed by RIL could be imported “as there is potential for shale gas development in India as well".

A Mumbai-based analyst with a local brokerage who did not want to be identified called “such minority buys a tutorial for RIL before it undertakes shale gas development on its own".

Already however, there are signs that RIL, since its acquisition of a stake in Atlas Energy’s Marcellus shale in April, has become more serious about the business.

The Indian company has a 49.9% stake in a venture with Pioneer (RIL invested $46 million in this) to form a so-called midstream joint venture that would gather the gas produced upstream and pass it on for downstream utilization. According to a person familiar with the development, who did not want to be identified, the midstream joint venture would create transportation infrastructure such as inter-state and intra-state pipelines.

Barclays Capital Plc and UBS Securities Llc acted as financial advisers to RIL. Baker Botts Llp acted as legal counsel to the Indian firm.

The financing of the deals wouldn’t have been a problem for RIL. It is likely to generate $18 billion in cash between 2011 and 2014, according to a Goldman Sachs estimate. And in the year to 31 March, RIL raised Rs9,334 crore by selling its own stock in the market. This was to fund its aborted acquisition of LyondellBasell for an estimated $14.5 billion.

Mahajan explained that the overhang in the natural gas market in the US currently could be making stakes in these shale gas assets available to RIL at attractive valuations. “Since gas prices in the US have bottomed, companies there might be finding it difficult to access finance and relying on external investors instead", he said.

Shale gas is a form of natural gas trapped in fine-grained sedimentary rocks and is extracted by horizontal drilling. Industry experts believe that shale gas could account for as much as half the natural gas produced in the US by 2020. Given the low carbon footprint of this fuel, its development is being actively pursued in regions such as Europe, Asia and Australia as well.

Gas prices in the US have shown a sharp decline in the first three months of 2010. Both Pioneer and Atlas reported net losses for the quarter ended 31 March. While Pioneer posted a loss of $245.25 million, Atlas had a net loss of $2.1 million.

After Thursday’s transactions, Pioneer and Reliance will own 46% and 45%, respectively, while Newpek, a wholly owned subsidiary of Mexican business group ALFA, SAB de CV, will hold the rest. The net resource potential of the gas field is around 10 tcfe (trillion cubic feet equivalents).