RIL realises five times its investment from Eagle Ford Midstream sale

Reliance Industries' return on equity from the sale of its Eagle Ford (EFS) Midstream joint venture with Pioneer Natural Resources in the US is five times of what it invested in the asset. RIL's realisation from the sale was $1 billion. It had spent $46 million in acquiring the 49.9 per cent stake in EFS and invested another $208 million over the years.

Reliance and Pioneer announced the sale of their joint venture to Enterprise Product Partners (EPD) for $2.15 billion. In June 2010, RIL had invested in the US shale gas business, where it bought a 45 per cent stake in the Eagle Ford shale gas fields, owned by Pioneer, for $1.315 billion. As part of the deal, RIL received a 49.9 per cent stake in the venture. Reliance has invested $8.2 billion in three shale assets so far and investments in the Eagle Ford shale acreage (including Midstream) stand at $4.3 billion.

Of the sale proceeds, $1.15 billion is due by the third quarter of 2015 and the rest within a year. The venture has built up 10 gathering plants and 740 km of pipelines for $550 million, with EPD likely to spend another $270 million over 10 years to keep pace with the upstream ramp-up.

"The final value outcome, even if it is a mix of outright and deferred cash, we believe is similar to investor expectations of $2-2.5 billion. It still represents a successful outcome for Reliance, much like the $7.2 billion sale of 30 per cent stake in its domestic assets to BP in 2011 has proved in hindsight," said Somshankar Sinha of Barclays Bank, Hong Kong.

"RIL’s shale gas assets in the US have been bearing the pain of weak oil and gas prices. The Eagle Ford asset will gain from the deleveraging resulting from the above sale. The continuing fall in rig costs cuts the well costs and, hence, is improving the economics, with RIL having indicated that drilling and completion costs have already fallen by 13 per cent in the fourth quarter of FY15," said Abhishek Agarwal from Macquarie Capital Securities India.

Reliance and Pioneer have also entered into a 20-year utilisation agreement with EPD, including a seven-year minimum volume commitment.

"The agreement will provide meaningful economic benefits, further improving cost competitiveness of the Eagle Ford upstream joint development operations," said Jal Irani of Edelweiss Securities.

After the announcment, RIL's scrip was trading flat at Rs 898.70 on the BSE exchange. The benchmark BSE Sensex closed down 2.4 per cent at 27,188.38.

Reliance Industries Limited (RIL)