2nd UPDATE: India's Reliance Jumps Into US Shale Gas Arena

Indian conglomerate Reliance Industries Ltd. (500325.BY) will spend $1.7 billion for a stake in a large U.S. natural gas field, the latest move by a large international company to tap into the natural gas boom in the U.S.

Reliance and Atlas Energy Inc. (ATLS) on Friday announced a deal in which Reliance would acquire a 40% stake in the Pittsburgh company's operations in the Marcellus Shale, a natural gas-rich rock formation underlying Pennsylvania, New York and other states.

The acquisition by Reliance is the first by an Indian company a region that has attracted such investors as Norway's Statoil ASA (STO) and Japan's Mitsui (MITSY), and sets a new benchmark for investment there.

In response, shares of Atlas were up 18% at $37.38 in recent trading, their highest level since mid-2008. Among other producers with a presence in the Marcellus area, Rex Energy Corp. (REXX) soared 6.7%, Range Resources Corp. (RRC) rose 4.1% and EXCO Resources, Inc. (XCO), which is openly seeking partners for a large stake in the Marcellus area, rose 4.4%. Chesapeake Energy (CHK), another big Marcellus player, rose 1.24% to $24.41.

Shares of Reliance, India's biggest company by market value, closed 1.8% higher at INR1,123.95 ahead of the announcement, compared with a 1.2% rise in the Bombay Stock Exchange's benchmark Sensex.

Under the agreement, the Indian company will pay about $340 million in cash and an additional $1.36 billion of capital costs for about 120,000 acres in the Marcellus Shale in southwestern Pennsylvania. Atlas had reportedly been shopping for a partner for several months.

The move by Reliance underscores the potential that large international companies see in the prospects for U.S. shale fields, which have produced an unprecedented bounty of natural gas for North American independent energy companies. The international players are also eager to learn how to extract gas from shale formations, and transfer those techniques to similar formations around the globe.

The Marcellus shale is among the larger shale formations, containing vast amounts of natural gas resources, though the area hasn't yet been developed as much as some other areas. The Marcellus is also attractive because it lies close to major consumption centers in the northeastern U.S.

Scott Hanold, analyst with RBC Capital Markets, said the deal announced Friday is the most lucrative in the Marcellus area to date. At more than $14,000 an acre, the deal is priced slightly higher than Anadarko Petroleum Corp.'s (APC) joint-venture with Mitsui, announced in February. In 2010, the average price for an acre in the Marcellus was $5,650, according to an RBC report.

Analysts with Tudor Pickering Holt said the terms of the deal were "bullish" for other players in the area. But RBC's Hanold noted that Atlas's acreage is relatively unique, because it lies in a big contiguous block that seems to be in the core area of the play.

Reliance, run by billionaire Mukesh Ambani, has been on the lookout for overseas oil and gas exploration and refining assets, having boosted its acquisition war chest by about $2 billion by selling treasury shares in the past few months.

Last month, the company bid $2 billion for a stake in Canadian oil sands company Value Creation Inc., but ultimately lost out to BP PLC (BP). Reliance also fell short in its bid to buy chemical company LyondellBasell Industries, which has filed for bankruptcy.

The transaction with Atlas is expected to close by the end of April.

"The financial commitment to this joint venture is likely to be about $5 billion over the next 10 years," Alok Agarwal, chief financial officer of Reliance, said at a press conference.

He said Reliance's share of development costs will be $3.4 billion. This will be in addition to the $1.7 billion agreed under the joint venture.

Reliance said it will also have the option to acquire a 40% share of all new acreage and the right of first offer in future sales by Atlas of an additional 280,000 acres not covered by the joint venture.

-By Jason Womack, Dow Jones Newswires; 713-547-9201;jason.womack@dowjones.com

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