Indian refiner Reliance Industries Ltd. has staked a position in the Marcellus shale in southwestern Pennsylvania in a joint-venture agreement with Pittsburgh-based Atlas Energy Inc. (Nasdaq: ATLS) for $1.7 billion in cash and drilling carries.

Reliance will pay approximately $340 million in cash and an additional $1.36 billion in drilling carry to acquire a 40% undivided interest in approximately 300,000 net acres (120,000 net to Reliance) of undeveloped leasehold. Atlas will be operator. In addition to funding its own 40% of drilling obligations, Reliance has agreed to fund 75% of Atlas’ portion of drilling and completion costs until the $1.36-billion drilling carry is satisfied. Atlas has five and a half years to utilize the drilling carry with a possible two-year extension.

The companies have agreed on a five-year development plan that includes drilling 45 horizontal Marcellus shale wells during the remainder of 2010, increasing to 108 wells in 2011, 178 in 2012, and 300 wells in 2013 and 2014. Reliance will have the option to operate in certain project areas outside of Atlas’ core operating areas of Fayette, Greene, Washington and Westmoreland counties in Pennsylvania.
Additionally, Reliance will have the option to acquire a 40% share of new acreage in an area of mutual interest, as well as a right to purchase an interest in an additional 280,000 Appalachian acres held by Atlas but excluded from the joint venture and AMI for $8,000 per acre. This acreage is predominantly in Mercer, Crawford and other Pennsylvania counties not currently included in Atlas’ core Marcellus area of southwestern Pennsylvania.

Atlas chairman and chief executive Edward E. Cohen says, “We are excited by this opportunity to partner with Reliance, one of the world’s largest vertically integrated energy companies, and one that has demonstrated exceptional capability in all aspects of the energy business…This transaction will enable us to accelerate sharply our development of the Marcellus, while further reducing our already low finding and development costs, and our capital structure will immediately benefit from reduced leverage and enhanced liquidity.”

In a statement, Reliance said the acreage will support the drilling of over 3,000 wells with a net resource potential of approximately 13.3 trillion cu. ft. equivalent (5.3 Tcfe net to Reliance).

Reliance Industries, one of the largest refiners and petrochemical producers in the world with a market capitalization of more than $78 billion, produces approximately 3 billion cu. ft. equivalent per day from its E&P operations. Atlas Energy last year merged with its MLP subsidiary to take advantage of its Marcellus shale opportunities.

The deal was expected to close in April.

Jefferies & Co. Inc. and J.P. Morgan Securities Inc. are financial advisors to Atlas Energy. Jones Day, Ledgewood and Wachtell, Lipton, Rosen & Katz are legal counsel. Barclays Capital Inc. is financial advisor to Reliance. Vinson & Elkins LLP is legal counsel. Bank of America Merrill Lynch provided strategic and financial advice to Reliance.

Analysts with Tudor, Pickering, Holt & Co. Securities Inc. and Pritchard Capital Partners LLC value the deal at approximately $14,000 per acre. KeyBank Capital Markets analyst Jack Aydin places the value at $14,167 per acre, “well ahead of our expectations and above the Anadarko/Mitsui JV.”