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Tuesday, April 13, 2010

RIL shares to gain from shale deal

Reliance Industries Ltd (RIL) has acquired 40% stake in Atlas Energy Inc.’s Marcellus Shale gas position in a deal valued at $1.7 billion. As per the deal, RIL will acquire 40% in about 300,000 acres (120,000 net to RIL) of undeveloped leasehold held by Atlas.

RIL would pay $340 million in cash and would spend an additional $1.36 billon towards a drilling carry for Atlas, i.e. RIL will fund 75% of Atlas’ drilling and completion costs. While Atlas will serve as the development operator, RIL is expected to act as a development operator in certain regions. The acreage has a resource potential of 13.3 trillion cu. ft (5.3 trillion cu. ft net to RIL). According to the management, RIL’s share of development cost is expected to be around $3.4 billon, taking its financial commitment to this joint venture to around $5 billion over the next 10 years. The deal would increase RIL’s global footprint, maintain its growth rate via presence in newer avenues. RIL can also use the technological know-how to develop the unconventional shale gas resources in the country.

With this deal, RIL will join the international oil companies who have bought into shale’s rock formations that could hold vast amounts of natural gas. The deal valued at $14,167 per acre is in line with the recent transaction of Mitsui with Anadarko Petroleum Corp., where Mitsui bought the stake at $14,000 per acre.

However, the deal appears expensive compared with historical valuations on per acre basis. However, notably all shale gas fields are different in terms of gas in place per tonne of shale, gas recovery rates, permeability and the capital cost of extraction. Hence, direct comparisons are not always possible.

We remain positive on RIL, and maintain a buy with a target price of Rs1,260.

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