RIL sheds acreage in U.S. and India to maximise shareholder value

Stock report
Source: DollarPhotoClub

India’s Reliance Industries has decided to shed one of its three shale ventures in the U.S. The company has announced that it wishes to sell its 45 per cent stake in the Eagle Ford basin shale oil and gas venture in the US for an estimated USD 4.5 billion.

Besides Eagle Ford, RIL has two more shale ventures in the U.S. – 40 per cent stake in Chevron’s Marcellus shale acreage and a 60 per cent interest in Carrizo Oil and Gas Inc’s Marcellus shale acreage in Central and Northeast Pennsylvania.

Reliance’s decision is widely suspected to have been motivated by ‘negligible’ results and further expected fall in profits caused by the falling crude oil prices. When contacted, however, the company refused to comment, stating only that “It is Reliance’s policy not to comment on market speculation. If there are any required disclosures, Reliance will make them at the appropriate time.”

Reliance Industries purchased the 45 per cent stake in Eagle Ford formation from Pioneer Natural Resources in June 2010, for the price of $1.31 billion. It is now reported to be working with Citigroup Inc. and Bank of America Merrill Lynch to find a buyer, industry sources said.

The company, in a July presentation to investors, had stated that it has invested a total of $ 3.91 billion in Pioneer joint venture since inception. Four hundred and seventy two wells have been drilled to date with an average production rate of 676 million standard cubic feet per day. Reliance’s total investment in US is $ 7.36 billion.

So far, Reliance’s return from its investment in Eagle Ford has been disappointing, and it’s likely to further diminish as a result of falling crude oil prices. Analysts warn that if crude oil prices fall below $80 per barrel, production of oil from shale gas formation in the US will become uneconomical. Such oil costs $50-100 a barrel to produce versus $10-25 a barrel for the normal supplies from the Gulf, says the Paris-based International Energy Agency.

Reliance’s decision to relinquish some of its U.S. assets may further be explained by the company’s decision to focus more on shale deposits in India.

“RIL was more interested in learning the ropes of shale gas development and business. India has good shale gas potential and private companies like Reliance will gain with their experience when the field is opened up in India,” said P Phani Sekhar, fund manager (PMS) at Angel Broking.

Having said that, Reliance has been also busy shedding its Indian assets as well. As The Hindu reports, the company is said to have been in discussions with Hardy Oil to sell one of its acreages in the western shore, which the two companies share in partnership.

The Hindu further reports that Reliance’s upstream business had taken a major hit with the output from its producing D-1 and D-3 gas fields in the Krishna Basin D6 block falling drastically. The fields, which once were producing from 18 wells, today are flowing gas only from eight wells. Together with MA fields in the block, the total number of producing wells was 12, another source said.

At present, Reliance has one block each in Krishna Godavari Basin (KG-D6), Cambay (CB-10), Mahanadi (NEC 25), and Saurashtra basin (GS-01), and two in Cauvery basin (CY D5 and CY D6). Besides, it also has stake in Panna-Mukta-Tapti fields and two Coal Bed Methane (CBM) blocks.

Reliance’s first quarter report also states that the company had relinquished an exploration block in Cauvery as part of its domestic portfolio rationalisation.

According to an official statement from Reliance Industries, the company has been shedding its assets in a bid to maximise the shareholder value, but – it reassured the investors and analysts – “this does not mean the company is exiting the business completely.”

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