Reliance Industries Ltd., India’s largest company by market value, agreed to its second U.S. shale-gas acquisition in three months, committing $1.3 billion for a stake in a venture led by Pioneer Natural Resources Co.
The company controlled by billionaire Mukesh Ambani will pay $263 million up front and fund $1.1 billion of drilling costs for Pioneer and Newpek LLC, its partner in the Eagle Ford shale formation of south Texas, according to a statement today by Mumbai-based Reliance. The deal will give Reliance a 41 percent working interest in the venture’s acreage, Irving, Texas-based Pioneer said in a separate statement.
Ambani agreed in April to pay Atlas Energy Inc. $1.7 billion for shale assets in Pennsylvania, joining Royal Dutch Shell Plc, BP Plc and Exxon Mobil Corp. in buying unconventional natural-gas reserves in the U.S. Reliance may have paid more than double the rate BP paid for similar assets in the Eagle Ford area, according to Sanford C. Bernstein Ltd.
“Our big concern is that Reliance is coming in fairly late in the game,” said Neil Beveridge, an analyst at Bernstein in Hong Kong. “Prices are considerably higher now, and Reliance is paying a premium.”
Reliance is paying $11,100 per acre, compared with $4,000 paid by BP in a March deal, according to calculations by Beveridge. The price is less than the $14,167 an acre paid for Reliance’s venture with Atlas in the Marcellus Shale formation.
Reliance fell 0.6 percent to 1,052.05 rupees in Mumbai. Pioneer dropped $2.22, or 3.3 percent, to $64.97 as of the 4 p.m. close of New York Stock Exchange composite trading.
Pioneer is accelerating drilling in Eagle Ford, as previously announced, Chief Executive Officer Scott Sheffield told investors today on a conference call. The venture will drill at least 20 wells this year, 70 wells in 2011, 120 in 2012 and 140 wells in 2013, he said.
The drilling plan will allow Pioneer to meet its lease commitments by the end of 2012, Sheffield said. With the Reliance investment, Pioneer will produce surplus cash as it drills out its leases, he said.
Pioneer’s share of production from the formation will be equivalent to about 5,000 barrels of oil a day by year’s end, Sheffield said.
Ambani told shareholders last week that Reliance can double its enterprise value, or market capitalization plus net debt and preferred equity, to $160 billion within a decade.
“Reliance aspires to build a significant position in the shale-gas business,” Ambani said in a June 18 presentation. “We will enhance efficiencies across the chain by drawing on our experience in drilling and project management. We will commit capital alongside proven low-cost operators to accelerate the development of this resource.”
Unconventional gas is the industry term to describe the fuel trapped in shale formations, coal beds and sandstone rock. BP Plc Chief Executive Officer Tony Hayward described shale gas as a “game changer” after it allowed the U.S. to overtake Russia in gas production last year.
Shale-gas deposits weren’t considered worth tapping before Houston billionaire George P. Mitchell pioneered new extraction techniques in the 1990s.
Shell, Europe’s largest energy producer, said May 28 it agreed to buy most of closely held East Resources Inc. for $4.7 billion, expanding its holdings of U.S. shale-gas deposits and giving it acreage in the Marcellus and Eagle Ford formations.
Exxon Mobil agreed in December to acquire XTO Energy Inc. for about $30 billion in December. Total SA accelerated its expansion into gas with the $2.25 billion purchase of U.S. assets from Chesapeake Energy Corp. in January.
Barclays Capital Inc. and UBS Securities LLC advised Reliance on the Pioneer transaction. The company, operator of India’s largest gas field, had cash and cash equivalents of 218.7 billion rupees ($4.7 billion) as of March 31.
Reliance will use its balance sheet to fund new ventures, including nuclear and solar energy, Ambani said on June 18. The company said it’s getting 118,000 net acres in the Eagle Ford venture.
Pioneer needed cash to meet its lease obligations, Sheffield told investors April 13, when he announced the company was seeking a development partner.
“We’ve got to drill about 400 wells over the next three to four years to hold most of our acreage,” Sheffield said at the time. “The objective of this joint venture is, of course, to accelerate drilling.”