How BP deal gives Reliance a push to expand overseas

Reliance Industries Ltd's $7.2 billion asset sale to BP PLC has given it the firepower to expand more aggressively overseas, potentially pitching it into competition with Asian rivals for big oil and gas deals.

Reliance, India's biggest company by market value, is looking abroad for growth after a string of domestic initiatives disappointed -- and the BP deal will swell its cash reserves to more than $14 billion.

It has built up a position in US shale gas over the past year, but lacks the global footprint of peers like PetroChina Co.

The Reliance-BP deal will also likely attract more global companies in future auctions of oil and gas blocks in India, and improve investors' confidence in the South Asian country, hurt by a recent string of corruption scandals.

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In yet another example of the growing business ties between the United Kingdom and its erstwhile colony, BP on Monday said it would pay $7.2 billion for a 30% stake in 23 oil and gas blocks of Reliance, plus another $1.8 billion, linked to future exploration success.

It includes the D6 block in the Krishna-Godavari basin, India's richest gas find so far, located off the country's east coast.

The two companies will also establish an equal joint venture for the sourcing and marketing of gas in India.

BP said future investments to develop the assets could bring its total payments to $20 billion, which would make the deal the largest foreign direct investment in India to date.

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The transaction will swell the coffers of Mumbai-based Reliance, which had cash reserves of $7.18 billion as of end-December.

This could force the company to hunt for bigger assets or deploy the cash in its other business ventures of retailing, power and telecommunications.

Reliance is expected to generate cash flows of $11.3 billion in the current financial year through March, which will receive a boost with the receipts from BP for the stake sale.

"We believe that Reliance would have to look at more avenues with significant cash deployment to effectively utilize its likely large cash flow generation," Sanjeev Prasad, Gundeep Singh and Tarun Lakhotia, analysts at Kotak Securities said in a note.

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They said Reliance has historically used its cash flows to fund new projects but the company's "new initiatives in India haven't been very successful and it is looking at overseas acquisitions to drive future growth."

At the same time, payment of higher dividends by Reliance would help to enhance shareholders' value, they said.

Reliance is not new to overseas acquisitions, having made three investments in shale gas business in the United States last year.

In April 2010, the company formed a joint venture with US-based Atlas Energy Inc. and bought a 40% interest in Atlas' Marcellus shale acreage for $339 million and an additional $1.36 billion in capital costs.

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Reliance will invest another $4.4 billion to fund its share of the development plan over ten years.

In June, Reliance acquired a 45% interest in Pioneer Natural Resources Co.'s Eagle Ford shale for $1.315 billion and an additional $4 billion investment in development over ten years.

And in August, it made a smaller $392 million investment for a 60% stake in a shale gas joint venture with Houston-based Carrizo Oil & Gas Inc.

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Reliance's billionaire chairman Mukesh Ambani said Monday that bulk of the money from the BP deal will strengthen the balance sheet of the Indian company but declined to elaborate.

Sanjay Mookhim and Saurabh Mishra, Mumbai-based analysts at Credit Suisse said the lack of clarity from Reliance on the end-use of its cash reserves and an expected "drag on returns can make the imperative for inorganic growth stronger."

Separately, Atul Rastogi and Nirmal Raghavan, analysts at Daiwa Securities said the deal will help Reliance further reduce its estimated net debt of about $8 billion as of end-December and also provide cash for future capital expenditure.

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At the same time, Reliance will gain from BP's technical muscle in deep-water exploration, crucial for the Indian company as it tries to lift production from the D6 block and gets more exploration success in its other oil and gas blocks.

The deal, which was announced after market hours in India on Monday, saw investors cheer the Reliance stock on Tuesday with the shares rising as much as 5.4% in a weak Mumbai market.

They were 4.3% higher at INR997.10 in afternoon trade on the Bombay Stock Exchange, outperforming a 0.57% decline in the benchmark index.

Rakesh Sharma in New Delhi contributed to this article.

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