Mumbai: Reliance Industries Ltd (RIL) has agreed to sell its investment in its US shale oil and gas transportation and distribution joint venture for $1.07 billion, generating proceeds the company can potentially invest in its US energy assets amid a plunge in crude prices.
RIL and US-based Pioneer Natural Resources Co. have agreed to sell Eagle Ford Shale (EFS) Midstream to an affiliate of Enterprise Products Partners Lp for $2.15 billion, the US-based joint venture partner said in a statement on Monday. RIL holds 49.9% in the venture, with Pioneer owning the rest.
“The purchase price for the EFS Midstream business will be paid by Enterprise in two instalments: $1.15 billion at closing, which is expected to occur early in the third quarter of 2015, and $1 billion 12 months after closing,” said the statement from Pioneer.
Enterprise will pay RIL about $574 million in cash at closing and make the final payment of $499 million in cash on or before the first anniversary of the closing date, RIL said in a separate statement. Citigroup and Bank of America Merrill Lynch acted as financial advisers for the transaction.
While RIL did not give a reason for the sale, Pioneer had said in November that exiting the transportation and distribution business would help the company focus on shale oil production. Search for a buyer for the midstream business was on since November, after a 45% fall in crude price dented the prospects of the US shale oil and gas industry.
“While Pioneer has said it will be investing in its other producing assets, for RIL it is just a way of cutting its costs as the company is not making much money in its shale investments in the US,” said an analyst from an international brokerage. He did not want to be named.
RIL had invested in the US shale gas business in 2010 when it bought a 45% stake in the Eagle Ford shale gas fields, owned by Pioneer, for $1.315 billion. As part of the deal, RIL got a 49.9% stake in the midstream venture (EFS Midstream). It’s this midstream business that both partners have now exited, while continuing to hold the shale gas production unit.
“EFS has succeeded in its objective of building the gathering and midstream infrastructure in a timely manner to support ramp-up of the Reliance-Pioneer Eagle Ford Upstream Joint Development operations. EFS has now transitioned from a ‘development’ mode to ‘stable operations’ mode, generating free cash flows since 2013,” said Walter Van de Vijver, president and chief executive of Reliance Holding USA Inc., adding that the venture provided an opportunity to unlock value for shareholders.
The EFS midstream system consists of 10 central gathering plants and approximately 740km of pipelines. Its cash flow from the midstream venture is expected to cross $100 million in 2015, said Pioneer in its earnings statement in February.
Along with the sale, RIL has also concluded a long-term agreement with Enterprise Products for using services and facilities of EFS Midsteam for its Eagle Ford Upstream Joint Development, the company said in its press release.
Still, the loss of cash flows from the venture will lead to higher production costs from Eagle Ford, said Pioneer.
“Upon closing of the transaction, Pioneer will no longer receive its share of the cash flow generated by the EFS Midstream business, which was forecast to be more than $100 million in 2015. The loss of this cash flow will result in an increase to Pioneer’s Eagle Ford Shale production costs of approximately $3.00 per barrel oil equivalent (BOE) and total corporate production costs of approximately $0.75 per BOE,” said the company.
According to an analyst with a domestic brokerage house, the deal would be profitable for RIL.
“RIL’s current investment in the venture is not known but we do not think it is higher than $500 million. Therefore, the deal will definitely be profitable for the company. However, Pioneer has indicated that the partners, as part of the new deal, will have to continue to pay for a number of years for some part of the business. These issues need to be clarified,” said the analyst, requesting anonymity citing company policy.
RIL’s shale gas investments have suffered because of a sharp fall in crude oil prices.
In April 2015, RIL had said that the upstream venture—shale oil and gas production— was facing macro headwinds due to a sharp fall in the price of crude oil and natural gas. The joint venture with Pioneer reported only a marginal growth in production, which stood at 735 million metric cubic feet per day of gas and 69,300 barrels per day of crude oil in the October-December 2014 quarter.
Source: Mint; 01 June 2015