GAIL (India) – Shale gas acquisition not material:RBS

GAIL has acquired 20% stake in the Carrizo operated shale gas assets in Eagle Ford shale (US)
for US$95m. Though it’s a producing asset, due to its small size, it will not materially impact
GAIL’s prospects where we remain pessimistic due to under-utilization of new pipelines for the
lack of gas supply sources


20% stake in Eagle ford shale
􀀟 GAIL has announced that its US subsidiary has entered into a joint venture to acquire 20%
stake in Carrizo operated Eagle Ford shale at the cost of US$95m. This comprises of
US$63.65m of upfront cash payment and additional US$31.35m of drilling carry. Carrizo
expects the $31.35 million drilling carry to be fully realized in less than one year
􀀟 The acquisition would be funded through debt-equity mix of 70:30.
The assets are already under production
􀀟 The Eagle ford shale is a liquid rich play. The assets under JV are already under production
with eight horizontal wells currently producing approximately 1,700 net bopd (340bopd net to
GAIL) and 3,800 net mcfd of rich gas (760mcfd net to GAIL). In mid 2011, Carrizo has
estimated proved reserves of 13.8mmboe (2.76mmboe to GAIL) of which 2.5mmboe are
classified as proved developed (0.5 million boe net to GAIL). A drilling rig is currently in the
process of drilling a four well pad on the JV assets which is expected to be completed and
brought on production near the end of this year.
Acquisition not material for GAIL
􀀟 This acquisition is in line with GAIL’s strategy of buying oil & gas assets outside the country
and bringing equity LNG into the country to support its pipeline business. That said, given the
small size of the acquisition, it would not have any material impact of its core pipeline
business which we believe would continue to remain under pressure due to lower utilization of
the new pipelines on account of lack of gas supply sources.
􀀟 On per acre basis, cost for GAIL comes to US$23,515/acre which prima facie looks expensive
compared to other deals in the Eagle ford shale. For eg , RIL had acquired 45% stake in
Pioneer Natural Resources operated assets in Eagle Ford shale in June 2010 for

US$11,110/acre. That said, we note that per acre based cost comparison may not be most
appropriate due to heterogeneity in shale gas plays and different production profiles etc.
􀀟 We believe that the returns on this acquisition, like all other shale gas acquisitions, would
depend upon rebound of natural gas prices in US which contrary to expectations have shown
no signs of improvement.