Reliance Industries has sold its stake in shale gas assets in Pennsylvania for $126 million, absorbing a stiff write-down in value on a seven-year-old investment. Reliance had acquired a 60 per cent stake in the upstream field in 2010 for $392 million as part of a joint venture with Carrizo Oil and Gas, which operated the field.
In an exchange filing on Friday, billionaire Mukesh Ambani’s conglomerate RIL disclosed that its US subsidiary Reliance Marcellus II, LLC was divesting interests in certain upstream assets in north-eastern and central Pennsylvania.
“The assets, which are currently operated by Carrizo Oil & Gas, Inc., were sold to BKV Chelsea, LLC, an affiliate of Kalnin Ventures LLC, for consideration of $126 million,” the filing said. RIL could receive contingent payments of up to $11.25 million in aggregate if the price of natural gas exceeds certain thresholds over the next three years.
The assets produce mainly gas and are located in Susquehanna, Wyoming, and Clearfield County in Pennsylvania. The transaction is expected to be closed by December 2018.
Kalnin Ventures LLC said the total transaction is valued at an aggregate price of $210 million, with potential additional payments to the sellers of up to $18.75 million over the next three years, depending on natural gas prices.
Separate purchase and sale agreements were entered into with Carrizo (Marcellus) LLC and Reliance Marcellus II, LLC, to acquire their respective interests in the assets.
The assets comprise of interests in 112 wells: 98 producing wells, 11 drilled and incomplete wells and three temporarily abandoned wells.
Walter Van de Vijver, President and CEO, Reliance Holding USA, Inc (of which Reliance Marcellus is a subsidiary), commented: “This transaction represents an opportunistic sale of developed upstream Marcellus assets and ends a successful partnership of 7 years with Carrizo in a joint sale. We will continue to actively manage the remainder of our US shale resources.”
RIL has invested over $9 billion in the shale play in the US. However, lower volumes and poor pricing for gas from the Marcellus region led the company to write down the value of its investments here.
In its 2017 annual report, RIL had said that Reliance Holding USA Inc delivered negative EBIT (loss) of ₹1,430 crore in CY 2016 compared to ₹3,280 crore in CY 2015. “Overall volume trends remained subdued reflecting the impact of forced curtailment of production at Marcellus and a ‘zero development’ strategy which are being pursued to conserve cash flows and safeguarding investment returns in a challenging business environment. Consequently, production (RIL share) was 14.6 per cent lower.
“The business is taking a cautious approach to resuming development and focussing on conserving cash and retaining optionality.” Over the last few quarters, RIL has been writing down the book value of its shale assets and had halted further capital expenditure in this segment.
An RIL spokesperson pointed out that simply by deducting the sale price of $126 million from the cost of purchase, $392 million, one could not conclude that there had been any loss incurred, since the field was bought in 2010 and over the past seven years, had produced and sold gas, earning revenues. An oil and gas analyst, however, said that since gas asset valuations are dependent on the prevailing price of natural gas, it would be fair to say that the field's valuation has reduced.