THE successful signing of joint venture deal with US-based Atlas Energy marks a major positive development for Reliance Industries after earlier attempts to acquire LyondellBasell in Europe and Value Creation in Canada failed. However, considering the deal size, the potential for similar joint ventures is high.
The Atlas Energy deal envisages RIL paying upfront $339 million for its 40% stake, followed by $1.36 billion out of Atlas’ share of exploration expenditure over a period of seven-anda-half years. In addition, towards its own share of exploration expenditure, the firm will shell out $3.4 billion over ten years. For a company that generated cash profit of $4.2 billion in the first nine months of FY10, and was carrying $3.4 billion as on December 31, 2009, these investments will hardly strain the company.
Since the initial payout under the deal can be easily met out of the company’s existing cash balances, RIL will not need to raise any debt for financing the deal. Similarly, the payment towards future exploration efforts too can be met through recurring cash flows from its existing assets. According to Goldman Sachs, RIL could have generated $25 billion in excess of its committed capex over the next four years and left the company cash surplus and debt-free by as early as FY13.
While RIL has signed the deal at a fair valuation, access to shale gas exploitation technology is a crucial strategic benefit to the company. RIL has retained the option to operate in certain project areas, although Atlas will serve as the development operator for the joint venture. RIL also gets the right of first offer in case Atlas plans to sell any more of its shale gas acreages not covered under the current agreement.
Similar to the coal-bedmethane (CBM), shale gas is an unconventional source of natural gas. Exploiting the shale gas became possible over the past decade due to development of innovative drilling techniques, including horizontal drilling and hydraulic fracturing to create fractures in the rocks to allow permeability. Exploiting shale gas is costlier to conventional gas due to the use of better technology, but the risk of failure is substantially low.
In the contracted area, Atlas and Reliance have already charted a five-year development plan to drill 45 horizontal wells during the remainder of 2010, increasing to a total of 300 wells in 2013. The development opens a new chapter for the Indian energy giant, which also recently completed setting up the solar power plants in New Delhi for the Commonwealth games. Apart from just studying the financial impact, investors should view this development as addition to the energy portfolio of the company improving its diversity.
The Atlas Energy deal envisages RIL paying upfront $339 million for its 40% stake, followed by $1.36 billion out of Atlas’ share of exploration expenditure over a period of seven-anda-half years. In addition, towards its own share of exploration expenditure, the firm will shell out $3.4 billion over ten years. For a company that generated cash profit of $4.2 billion in the first nine months of FY10, and was carrying $3.4 billion as on December 31, 2009, these investments will hardly strain the company.
Since the initial payout under the deal can be easily met out of the company’s existing cash balances, RIL will not need to raise any debt for financing the deal. Similarly, the payment towards future exploration efforts too can be met through recurring cash flows from its existing assets. According to Goldman Sachs, RIL could have generated $25 billion in excess of its committed capex over the next four years and left the company cash surplus and debt-free by as early as FY13.
While RIL has signed the deal at a fair valuation, access to shale gas exploitation technology is a crucial strategic benefit to the company. RIL has retained the option to operate in certain project areas, although Atlas will serve as the development operator for the joint venture. RIL also gets the right of first offer in case Atlas plans to sell any more of its shale gas acreages not covered under the current agreement.
Similar to the coal-bedmethane (CBM), shale gas is an unconventional source of natural gas. Exploiting the shale gas became possible over the past decade due to development of innovative drilling techniques, including horizontal drilling and hydraulic fracturing to create fractures in the rocks to allow permeability. Exploiting shale gas is costlier to conventional gas due to the use of better technology, but the risk of failure is substantially low.
In the contracted area, Atlas and Reliance have already charted a five-year development plan to drill 45 horizontal wells during the remainder of 2010, increasing to a total of 300 wells in 2013. The development opens a new chapter for the Indian energy giant, which also recently completed setting up the solar power plants in New Delhi for the Commonwealth games. Apart from just studying the financial impact, investors should view this development as addition to the energy portfolio of the company improving its diversity.
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