Shares of Atlas Energy Inc. rose by 20% after the deal with Reliance Industries Ltd (RIL) was announced. And an unusually large number of Atlas call options were traded on Friday. For every put option trade, there were over six calls traded, resulting in an extremely low put-call ratio—a sign of high bullishness. Evidently, Atlas’s Marcellus shale assets had been valued at far lower levels by the markets compared with the valuation RIL agreed to for a 40% stake.

Also See Valuation Surge (Graphic)

Atlas has a total area of 584,000 acres under its control in the Marcellus fields. Under the joint venture with RIL, 300,000 acres in the core Marcellus area of south-western Pennsylvania will be developed. RIL has paid $1.7 billion (around Rs7,550 crore) for the 40% stake, implying a valuation of $14,000 per acre. According to a note by brokerage Stifel Nicolaus quoted by, the market had been pricing in a valuation of roughly $5,400 per acre. Also, Atlas’ 60% stake in the venture is valued at $2.55 billion, based on what RIL has agreed to pay. Prior to the transaction, Atlas’ entire market capitalization stood at $2.49 billion. In that backdrop, the sharp rise in its shares is not surprising.

Some analysts say that apart from having an economic interest in the Marcellus shale area, the joint venture would also give RIL experience with a new technology, which can be applied in other regions. The technology involves running horizontally drilled wells through the shale (sedimentary rock layers) and fracture it under high pressure to release the trapped natural gas. Advances in technology in recent years have made shale gas production more profitable, and, hence, the surge of interest in acquiring such assets.

In February, Japan’s Mitsui and Co. entered a similar joint venture with Anadarko Petroleum Corp., by investing $1.4 billion in the latter’s Marcellus shale assets (again at a valuation of $14,000 per acre). And in January, French oil company Total SA paid $2.25 billion for a stake in a Barnett shale asset owned by Chesapeake Energy Corp. The Barnett asset has 270,000 acres under development, implying a much higher valuation on a per acre basis. But it also has approximately 700 million cu. ft of natural gas equivalent per day of current net production and approximately 3 trillion cu. ft of natural gas equivalent (tcfe) of proven reserves.

The Marcellus asset under the RIL-Atlas joint venture has estimated recoverable reserves of 13.3 tcfe. RIL has the option to acquire a 40% stake in all new development plans as well as a right to first offer with respect to potential future sales by Atlas of the additional 280,000 acres currently controlled by it in the Marcellus area at $8,000 per acre.

Even while the sharp rise in Atlas’ shares suggests that it has sold its assets at a very attractive price, RIL’s shares are unlikely to correct, given the benefits of access to a new technology and diversification of its portfolio. More importantly, perhaps, the markets will be pleased about the fact that RIL has finally been successful in deploying a reasonable chunk of its surplus cash. Considering that its domestic operations will throw up a lot more cash from this year onwards, it would need to find more such opportunities to enhance shareholder returns.

Graphic by Naveen Kumar Saini/Mint

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