Anand Rathi, ::RIL-BP deal: Eases concerns on RIL’s E&P business

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Reliance Industries
RIL-BP deal: Eases concerns on RIL’s E&P business
The BP deal fairly values RIL’s E&P portfolio and would help to
restore confidence on its E&P business. RIL under-performed by
16% last year due to concerns on its KG D6 ramp-up and slow
progress in its other E&P assets; we expect a reversal in the underperformance.

 Deal details. RIL has agreed to give BP a 30% stake in its 23 E&P
assets in India (all key blocks, excl. PMT) for US$7.2bn. BP would
also pay US$1.8bn to RIL on future exploration success that result in
development of commercial discoveries. RIL would also form a 50:50
JV with BP for sourcing and marketing gas in India.
 Restore confidence in E&P assets. This deal would enable RIL to
use BP’s expertise to resolve the complexity in the KG D6 reservoir
and provide better visibility of a ramp-up in gas production. Also,
RIL would be able to expedite exploration and development of its
other key blocks: KG D3, KG D9, the Mahanadi basin, NEC,
satellite discoveries, etc. Further, RIL is getting a fair value for its
assets, in our view. Our valuation of BP’s 30% stake is US$7.8bn, in
line with the US$7.2-9bn that BP has agreed to pay.
 Underperformance unjustified. Despite the refining and petrochemical
business doing well, RIL has under-performed by 16% last
year due to concerns on the KG D6 ramp-up and slow development
of its other key E&P blocks. Hence, BP taking a significant stake in
RIL’s E&P portfolio would restore confidence in RIL’s E&P assets.
At current valuations, the stock trades at 12.4x FY12EPS. We have
a Buy rating on the stock, with a target price of `1,250.