Indian energy giant Reliance Industries will pay $1.7 billion to form a joint venture at one of the most promising natural gas deposit regions in the U.S. with Atlas Energy, becoming the latest foreign company to invest in shale plays that are expected to be very lucrative.
Reliance, controlled by billionaire Mukesh Ambani, has been working hard to expand its presence outside India, break into new markets and broaden its various businesses including refining, oil and gas exploration and petrochemicals.
India's largest listed firm will pick up a 40 percent stake in Atlas's operations in the booming Marcellus Shale -- a gas project that spans parts of Pennsylvania, West Virginia and New York in the United States and which, according to some geologists, could hold enough natural gas to satisfy U.S. demand for a decade.
With this move it joins a number of international oil companies including BP Plc, Total, Statoil and Mitsui & Co who have bought into shales, rock formations that could hold vast amounts of natural gas.
While the shale formations have proven to be lucrative, they are also very expensive to develop and environmentally sensitive. The joint ventures have given the independent oil companies who own much of the acreage in these areas access to capital and should allow foreign oil companies to pick up expertise in new drilling techniques developed for the shales.
This marks Reliance's foray into a totally new venture altogether. Reliance is going to generate a lot of cash flows going ahead and investments in shale gas could be a good growth opportunity, said Deepak Pareek, oil and gas analyst with Angel Broking.
Reliance Chairman Ambani, who according to Forbes is the world's fourth-richest man with a net worth of $29 billion, has made no secret of the firm's overseas ambitions as the company has raised a war chest of $2 billion by selling stock in recent months.
But Reliance, founded by Ambani's father Dhirubhai, a school teacher's son, had not met with much success until now in its foreign takeover attempts.
Bankrupt petrochemicals firm LyondellBasell recently rejected a bid from Reliance that valued the target at about $14.5 billion, and the Indian firm also lost a race for Canadian oil sands firm Value Creation, in which it wanted to take a majority stake for $2 billion.
Shares in Reliance closed up 1.8 percent on Friday, while the Mumbai market rose 1.2 percent.
Atlas Energy shares jumped $6.44, or 20.3 percent, to $38.25 on the Nasdaq on Friday.
Shares of other companies with acreage in the Marcellus Shale, including Exco Resources and Range Resources, were also boosted by the news.
More joint ventures in the region can be expected to follow, bankers said. Exco, in particular, should be closely watched. Chief Executive Doug Miller said in February that the company was in discussions for a potential joint venture with its acreage there.
Atlas's core Marcellus position consists of about 300,000 acres, largely in southwestern Pennsylvania, out of which about 120,000 acres will go to Reliance, the companies said.
Upon closing Reliance will pay about $340 million in cash and must also contribute $1.36 billion to the joint venture to develop the shale project, Atlas said in a statement.
Reliance is paying around $14,000 an acre for its share of the Marcellus acreage, which is in line with what Japan's Mitsui paid for its joint venture with Anadarko Petroleum Corp announced in February [ID:nN16229402]. Still, the price is more expensive than most of the previously announced deals.
The members of Atlas's management team have a background in finance and are known for their deal making skills, said Marshall Carver, energy analyst at Capital One Southcoast in New Orleans.
Atlas Energy Chairman Edward Cohen is also chairman of Resource America Inc, a publicly traded asset management company, and Chief Operating Officer Richard Weber was head of energy investment banking at KeyBanc Capital Markets from June 1997 to March 2006.
This deal was certainly done at a good price for Atlas, Carver said.
Atlas will serve as the development operator for the joint venture, and will retain a 60 percent undivided interest in the acreage.
Reliance will have the option to buy 40 percent in all new acreages, and also has the right to first offer for potential future sales by Atlas of about 280,000 additional Appalachian acres controlled by the U.S. firm.
Debate over drilling in the region has sharpened in recent months. Environmentalists claim the drilling fluids needed to crack the rock and free the gas can contaminate drinking water, an assertion the industry hotly disputes.
Jefferies & Co was the lead financial advisor, while J.P. Morgan Securities was another advisor to Atlas.
Barclays advised Reliance on the deal, which is expected to close by the end of April.
(Additional reporting by Indulal P.M. in Mumbai and Anna Driver in Houston; Editing by Rupert Winchester, Phil Berlowitz and Bernard Orr)