RIL-Pioneer deal as value accretive from onset: Macquarie

Reliance Industries has signed a USD 1.15 billion joint venture with Pioneer Natural Resources, reports CNBC-TV18. The latter will sell 45% interest in Eagle Ford Shale acreage in south Texas. RIL is looking to build its presence in the US shale gas sector.

In an interview with CNBC-TV18, Jal Irani of Macquarie spoke about his reading of the RIL- Pioneer deal and road ahead for RIL.

Q: What do you make of this move on Eagle Ford, for yet another shale gas unit from RIL?

A: Based on our analysis, at even the worst case scenario of USD 10,000 an acre, the IRR would work out to 17%. Now it seems that RIL has acquired even cheaper, so it seems like a fairly good deal. The Pioneer’s acreage in Eagle Ford itself is second largest in that shale gas region. It also seems to have acquired one of the larger acreages there.

The cost per acre works out to USD 8200 per acre this compares with USD 14,000 per acre for RIL’s Marcellus acquisition just a couple of month’s back, so it’s significantly cheaper than its early acquisition 40% cheaper.

Q: So will it be value accretive for them from the word go? Any sense of what kind of realizations they may have over here?

A: We will have to calculate that but given that on a worst case basis with actually USD 10,000 per acre the IRR was working out at 17%, so it's value accretive at that point. At USD 8200 per acre, it would seem that it would be even more value accretive. I am just commenting from headlines. We need to see there are any final details to this. But on the face of it the answer is yes.

Q: What do you make of RIL’s strategy in Shale Gas because this is not the first one there have been a string of deals which RIL is putting together on Shale gas assets, what do you make of it directionally?

A: There is couple of things here. RIL management group philosophy has improvised into getting into newer fast growing technologies with arguably potentially higher returns and high risk. Now shale gas is one such sort of technological of innovation and an extremely large one. In the US itself out of the one trillion dollars which are expected to be spent on upstream exploration and development, 80% of it is meant to be in shale gas and shale gas itself from an economic perspective the cost are falling and in fact shall potentially become even cheaper than your conventional gas.

As a result, RIL is really going for something which is potentially extremely large and it is actually at a cutting edge of technology and gives it a huge competitive advantage in an extremely large market. This can progressively be utilized in India also, it is too premature for India but India also seems to have some decent size hydro-carbon reserves and shale is nothing but source rock. So, it could potentially be extended to India also.

Source: Money Control

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