Reliance close to selling stake in US shale gas JV

Stake valued at $4 billion, against initial expectation of $4.5 billion

India’s largest corporate entity, Reliance Industries Ltd (RIL), is set to sell its 45 per cent stake in a shale gas joint venture with Pioneer Natural Resources at Eagle Ford, US, by next week at a far lower valuation than its initial expectation of $4.5 billion. The drop in valuation is largely due to the fall in prices of crude oil since the sale process began last year, as well as concern about damage to the environment due to fracking in the US.

Now, RIL’s stake is likely to be valued at about $4 billion.

Bankers say the Eagle Ford Midstream sale process took much longer than expected due to complexities in the contractual arrangements such as Pioneer moving away from providing its own drilling services and contracting these to a third party. Negotiations on committing volumes to the third party also led to delay in closing the deal.

“But the company (Pioneer) remains very optimistic that it will announce the sale of this business within the first week of June and its proceeds will substantially improve the balance sheet of the partners,” said a banker. Pioneer, the operator of the field, holds 46 per cent stake in the Eagle Ford venture, while nine per cent is held by Alpha SAB’s Newpeck LLC.

When contacted, an RIL spokesperson said the company constantly strived to identify means to create additional value for its shareholders. “It is Reliance’s policy not to comment on market speculation. If there are any required disclosures, the company will make them at an appropriate time,” he said.

In June 2010, RIL had bought 45 per cent stake in Pioneer’s Eagle Ford shale formation in south Texas for $1.31 billion. In all, it has invested $3.91 billion in the Pioneer joint venture. RIL has also entered into two more partnerships in the US, with strong local operators — Carrizo and Chevron. So far, it has invested $7.9 billion in the three ventures.

Analysts say falling crude oil prices, coupled with widespread protests against shale gas projects in the US, are increasing risks for investors. Many states in the US have banned shale gas projects, saying these contaminate ground water with chemicals. Due to these factors, many companies are reducing their exposure to shale gas assets in that country.

Analysts say RIL’s score on the shale gas front hasn’t been good. The company reported a 33 per cent quarter-on-quarter decline in revenue at $138 million and a 48 per cent decline in earnings before interest, tax, depreciation and amortisation at $91 million in the quarter ended December 2014; the decline in production volumes stood at five per cent. The company invested an additional $234 million in this segment in the quarter ended March this year.