India's largest private-sector company Reliance Industries (RIL) will invest $1.7 billion in a joint venture with US firm Atlas Energy Resources that will develop a shale property to yield natural gas.
Reliance will pay $339 million in cash at closing and will fund $1.36 billion of capital costs, the drilling carry, to acquire a 40% interest in approximately 300,000 net acres (120,000 net to Reliance) of undeveloped leasehold land held by Atlas. Atlas will retain the remaining 60% interest in the acreage.
The $1.36 billion provided by Reliance will fund 75% of Atlas's portion of the drilling and completion costs until the drilling carry is fully utilised. Atlas has 5.5 years to utilise the drilling carry, subject to a two-year extension under certain conditions, which makes for a maximum seven-and-a-half year development programme. Atlas and Reliance have agreed a five-year development plan that calls for the drilling of 45 horizontal Marcellus Shale wells during the remainder of 2010, increasing to 108 wells in 2011, 178 wells in 2012, and 300 wells in 2013 and 2014.
The JV agreement also envisages that Atlas will continue to acquire acreage in the Marcellus region and RIL will have an option to buy 40% of any new land acquired. RIL has also negotiated a first right of refusal on another 280,000 acres controlled by Atlas at a price of $8,000 per acre. This acreage is located predominantly in Mercer, Crawford, and other Pennsylvania counties not currently included in Atlas's core Marcellus area in southwestern Pennsylvania.
The deal is subject to certain closing conditions, including the consent of lenders to Atlas. It is expected to close this month.
Atlas will be development operator for the JV. RIL will have the option to operate in certain project areas in the coming years outside of Atlas's core operating areas in Washington and southwestern Pennsylvania.
Atlas Energy last year appointed Jefferies & Company as lead financial adviser and J.P. Morgan Securities as financial adviser to help it find a joint venture partner. Jones Day, Ledgewood and Wachtell, Lipton, Rosen & Katz acted as legal counsel to the company.
Reliance Industries was advised by Barclays Capital and took legal advice from Vinson & Elkins. Additionally, Bank of America Merrill Lynch provided strategic and financial advice to Reliance Industries.
New York Stock Exchange-listed Atlas is one of the largest independent natural gas producers in the Appalachia and Michigan Basins and a leading producer in the Marcellus Shale in Pennsylvania. Its share price gained as analysts predicted it would be able to accelerate its development with the backing of Reliance.
As for RIL, it has been scouting for a large cross-border acquisition for some time as its controlling shareholder, Indian billionaire Mukesh Ambani, seeks to expand his empire to the West.
For a few months, Reliance was preoccupied with a bid for bankrupt LyondellBasell, one of the world's largest polymers, petrochemicals and fuels companies. However, RIL's bid for LyondellBasell was rejected by creditors of the Netherlands-based firm earlier this year. Neither the buyer nor the target ever made the value of the bid public, but media reported that RIL finally tabled a bid of $14.5 billion. Reliance was then rumoured to be eyeing Canadian oil sands company Value Creation, but Value Creation last month announced a deal to sell a majority stake to British energy firm BP.