Saturday, 26 June 2010

Reliance - Shale Cost

Reliance in past two months has made its presence felt in the emerging Shale Gas business with acquisitions of stake in two companies i.e. Atlas Energy Inc for its marcellus shale acres at pennslyvannia and Pioneer Natural Resources Company for its Eagle Ford Shale acreage.
Reliance has always been reluctant to invest in the international markets as they consider them to be more risky propositions. The thumb rule used while investing is the proposed venture should give them returns of average 20% on the investment. In case of the ventures outside India, they expect the returns to be atleast 10% higher considering the additional political risk involved.

Reliance has agreed to pay $1.699 billion for 40% stake in Atlas Energy's venture & $1.315 billion for 45% stake in the Pioneer's venture. the average acreage accrued by Reliance is 1,37,000 acres and 1,18,000 acres respectively. The average cost per acre is around $11,820 together

we will now view these investments in the above mentioned ventures.

Company : Atlas Energy
Venture : Marcellus Shale
Total acreage : 343,000
Reliance Share : 137,000
Total Cost : $ 1699 million
Cash payment : $ 339 million
Balance : $1,360 million (carry arrangement)
period : 4 years (assumed)
Normal cost per acre : $12,401
discounted cost per
acres : $6,309

If we consider reliance will maintain its rate of return of 30% as expected, then the price appears to be far cheaper. further, the company already has 5 wells running and producing around 28 mmcfe per day.

Now lets look at the Pioneer deal:

Company : Pioneer Natural Resources
Venture : Eagle Ford Shale
Total acreage : 289,000
Reliance Share : 118,000
Total Cost : $ 1315 million
Cash payment : $ 263 million
Balance : $1,052 million (carry arrangement)
period : 4 years (assumed)
Normal cost per acre : $11,144
discounted cost per
acre : $5,428

Keeping this analysis, Reliance seemed to have struck bargain.
am still wondering, why markets have not factored in these gains and only looked at absolute investments and not the discounted ones...