Ambit Capital maintains ‘Buy’ on RIL with target of Rs 1220/share

MUMBAI: Ambit Capital has maintained ‘Buy ’recommendation on Reliance Industries after the company announced that it would pay $1.7 billion to form a joint venture with Atlas Energy of the US.

RIL has acquired a 40% interest in approx. 300,000 acres (120,000 net to RIL) of undeveloped leasehold held by Atlas for a consideration of US$1.7bn. This is split into an upfront payment of $339mn in cash (payment of land costs) and the rest US$1.36bn in the form of a drilling carry.

Atlas has 5.5 years to utilise the drilling carry, subject to two year extension under certain conditions. RIL would spend an additional US$3.4bn over 10 years in the development of the block. Also, RIL has the option of acquiring additional acreage at US$8,000 per acre in the Appalachian region if Atlas decides to sell all or part of the 280,000 acres.

“Our initial analysis of the transaction on RIL's estimates/fair value suggest that the impact would be fairly muted (2-3% to earnings/fair value). However, an access to the attractive shale gas play in the US concomitant with acquisition of technological know-how makes this JV an attractive proposition for RIL, we reckon. We are keeping our estimates/fair value unchanged, given that the deal is yet to close (expected by April end) and maintain our BUY recommendation on the stock with a target price of Rs 1,220,” the report said.