Commodity plunge prompts RIL to cut capex at US shale venture

Mumbai: Falling energy prices that discourage expanding production have forced Reliance Industries Ltd (RIL) to cut capital expenditure in its US shale energy ventures.
The planned expenditure cut of nearly 30% for 2015-16 is the first since RIL ventured into shale gas and oil, which is trapped in underground shale rock and extracted by pumping high-pressure water and sand.
At a conference of analysts on Friday, RIL executives said capital expenditure for 2015-16 has been cut to $860 million from roughly $1.2 billion spent in 2014-15 due to poor outlook for both natural gas and crude oil, said an analyst from a domestic brokerage who attended the conference.
The meeting was held after India’s largest private sector energy firm by market value announced its March quarter earnings.
RIL, which entered the US shale industry in 2010, is now present in three separate ventures. In Pennsylvania’s prolific Marcellus region, RIL has two joint ventures; one with Atlas Energy Inc., now owned by Chevron Corp., and the second with Carrizo Oil and Gas Inc. In Texas’s Eagle Ford shale acreage, it has a third joint venture with Pioneer Natural Resources Co.
The prices of gas and oil produced in US are linked to the benchmark West Texas Intermediate (WTI) crude oil price and Henry Hub gas price, respectively. Both these benchmarks have fallen. Consequently, for the first time since its entry into the business, shale revenue fell from the immediate preceding quarter, as well as from the corresponding quarter of the previous year.
RIL, which reports its shale energy figures with a lag of one quarter, said revenue from the business fell 13.6% in October-December 2014 to `1,286 crore from July-September and down 6.5% from October-December 2013.
During the period, its operating profit—reported as earnings before interest and tax—was `336 crore, down 40.7% annually and 23.1% sequentially.
On Friday, the company said in a note that the shale gas business continued to witness a turbulent time, with sequential softening of commodity prices.
“Operational performance remained strong, with continued production ramp-up, lower opex and lower capex with improving efficiencies and costs. However, business performance (revenue and earnings) suffered due to sharply lower realization during the quarter,” RIL said in the note.
In the last three months of 2014, WTI crude oil averaged 34% lower sequentially at $48.63 per barrel and Henry Hub gas averaged 23% lower sequentially at $2.88 per million metric British thermal units (mmBtu) in the March quarter, according to Bloomberg.
“A low price regime in both natural gas and crude oil is putting tremendous pressure on US shale gas companies and RIL and its partners cannot escape that,” said the analyst quoted above. He did not want to be quoted due to his company policy.
As of December 2014, RIL produced 1.2 billion cu. ft of equivalent per day of gas, which comprises the cumulative production of oil and gas from the shale asset. The firm does not give individual production figures of both commodities produced in US.
In February, Pioneer—RIL’s partner in Eagle Ford—said due to the sustained poor outlook of commodity prices, the firm was cutting down its drilling and completion cost by 20% for the calendar year 2015.
Drilling and completion cost refers to the capital expenditure incurred for drilling new wells and bringing them into production.
“As a result of the significant drop in commodity prices, the firm has implemented initiatives to reduce capital spending, operating costs and general and administrative expenses to minimize spending in excess of estimated cash flows for 2015 and to maintain significant financial flexibility,” according to Pioneer’s 20 February annual report.
Low commodity prices have also forced both RIL and Pioneer to freeze the sale of their midstream venture in the US which was set up to evacuate and distribute natural gas and crude oil.
In November, both RIL and Pioneer had evinced interest in selling off the midstream venture. However, Pioneer, in its annual report released in February, pointed out that in the current market conditions, a possible sale might be in doubt.
RIL, which spent $2.046 billion to acquire its US shale energy stakes, has so far invested a total of $8.1 billion in these operations and has 2.95 trillion cu. ft of reserves at the end of December 2014. The US shale gas business is currently trading at a valuation of `85 per share out of the total equity value of a little over `1,000 per share valuation of the total business, said another analyst with a domestic brokerage, who is not authorized to speak to the media.
He said the cut in capex by RIL was expected and has already been factored in the share price.
Source: Mint; 20 April 2015
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