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RIL sells 30% stake in 23 oil and gas blocks to BP
Reliance Industries Ltd. (RIL) and global oil major British Petroleum (BP) have
announced a historic partnership deal. As per the partnership deal, spanning
across the full value chain, BP will be buying a 30% stake in 23 oil and gas
production-sharing contracts that RIL operates in India, including the producing
KG-D6 block, and the formation of a 50:50 joint venture (JV) between the two
companies for sourcing and marketing gas in India. The JV will also endeavour to
accelerate the creation of infrastructure for receiving, transporting and marketing
natural gas in India. BP will pay RIL an aggregate consideration of US $7.2bn.
Future performance payments of up to US $1.8bn could be paid based on
exploration success, which would lead to development of commercial discoveries.
These payments and combined investment could amount to US $20bn.
Our take: We believe the deal is positive for RIL as the combined expertise of both
the parties could result into optimisation of producing blocks and enhancement of
resources in exploratory blocks. The transaction amount seems to assign lower
value of `363/share to the east coast blocks vis-à-vis our valuation of
`409/share, as BP is expected to incrementally incur its share of capex into the
commercialisation and development of blocks, which have already been factored
by us for valuation.
Outlook and valuation: The deal seems to be value and earnings accretive in the
long term, considering the technical expertise BP brings on table. We do not
change our earnings estimates and valuation pending regulatory approvals.
However, once the deal goes through, dip in valuation on account of shedding
30% share in east coast blocks will be offset by cash consideration and rerating of
blocks on account of synergy arising out technical expertise of both the proficient
parties. We maintain our Buy view on the stock with an SOTP-based target price
of `1,160. Our valuations and earnings would be revised post regulatory
approvals and further clarity on capex to be incurred block wise and deployment
of cash generated.
Exhibit 2: SOTP valuation (FY2012E)
Business segment (` cr) `/share
Refining (EV/EBITDA 7x) 376
Petrochemical (EV/EBITDA 7x) 272
KG-D6 Gas (DCF) 182
KG-MA Oil (DCF) 45
NEC-25 (EV/boe 5.5x) 66
D3 (EV/boe 5.5x) 73
D9 (EV/boe 5.5x) 43
Shale gas ventures (EV/boe 3.5x) 70
Other prospective basins 68
Retail 30
Investment/Others 44
Total EV 1,270
Net debt (110)
Equity value (`) 1,160
Source: Company, Angel Research
India Equity Research Reports, IPO and Stock News
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Reliance Industries – Event Update
Angel Broking maintains a Buy on Reliance Industries with a Target Price of Rs. 1,160
RIL sells 30% stake in 23 oil and gas blocks to BP
Reliance Industries Ltd. (RIL) and global oil major British Petroleum (BP) have
announced a historic partnership deal. As per the partnership deal, spanning
across the full value chain, BP will be buying a 30% stake in 23 oil and gas
production-sharing contracts that RIL operates in India, including the producing
KG-D6 block, and the formation of a 50:50 joint venture (JV) between the two
companies for sourcing and marketing gas in India. The JV will also endeavour to
accelerate the creation of infrastructure for receiving, transporting and marketing
natural gas in India. BP will pay RIL an aggregate consideration of US $7.2bn.
Future performance payments of up to US $1.8bn could be paid based on
exploration success, which would lead to development of commercial discoveries.
These payments and combined investment could amount to US $20bn.
Our take: We believe the deal is positive for RIL as the combined expertise of both
the parties could result into optimisation of producing blocks and enhancement of
resources in exploratory blocks. The transaction amount seems to assign lower
value of `363/share to the east coast blocks vis-à-vis our valuation of
`409/share, as BP is expected to incrementally incur its share of capex into the
commercialisation and development of blocks, which have already been factored
by us for valuation.
Outlook and valuation: The deal seems to be value and earnings accretive in the
long term, considering the technical expertise BP brings on table. We do not
change our earnings estimates and valuation pending regulatory approvals.
However, once the deal goes through, dip in valuation on account of shedding
30% share in east coast blocks will be offset by cash consideration and rerating of
blocks on account of synergy arising out technical expertise of both the proficient
parties. We maintain our Buy view on the stock with an SOTP-based target price
of `1,160. Our valuations and earnings would be revised post regulatory
approvals and further clarity on capex to be incurred block wise and deployment
of cash generated.
This deal includes 23 blocks of oil and gas operated by RIL, including D6 block
and all other east coast blocks. Most of the blocks are yet to be appraised and
commercialised. Thus, the transaction amount of US $7.2bn being paid by BP
seems to assign lower value of `363/share to these blocks vis-à-vis our
valuation of `409/share, as BP is expected to incrementally incur its share of
capex into the commercialisation and development of many blocks already
factored by us for valuation.
Exhibit 1: Evaluation of RIL’s east coast blocks
Prospective basins Est. 2P Reserves (mmboe)
KG-basin 2,413
MA-Oil 150
NEC-25 793
D3 884
D9 512
Total 4,751
Value assigned by BP
Deal value (in ` cr @ `45/US$) 108,000
EV/boe (x) 5.1
EV/Share (`) 363
Our estimates
Deal value (in ` cr @ `45/US$) 1,21,847
EV/boe (x) 5.7
EV/Share (`) 409
Source: Company, Angel Research
The deal seems to be value and earnings accretive in the long term, considering
the technical expertise BP brings on table. We do not change our earnings
estimates and valuation pending regulatory approvals and block wise details of
capex expected to be incurred by both the parties. However, once the deal goes
through, dip in valuation on account of shedding 30% in the east coast blocks will
be offset by cash consideration and rerating of blocks due to synergy arising out of
technical expertise of both the proficient parties.
We see material impact in FY2013E earnings, which are under review, as 30% of
the producing blocks (KG-D6 and MA-oil) will be transferred to BP. There might be
a material spurt in other income as no strategy for the deployment of cash
generated out of this deal has been devised yet by RIL. Our valuations and
earnings would be revised post regulatory approvals and further clarity on capex to
be incurred block wise and deployment of cash generated. We continue to
maintain our Buy view on the stock with an SOTP-based target price of `1,160.
Exhibit 2: SOTP valuation (FY2012E)
Business segment (` cr) `/share
Refining (EV/EBITDA 7x) 376
Petrochemical (EV/EBITDA 7x) 272
KG-D6 Gas (DCF) 182
KG-MA Oil (DCF) 45
NEC-25 (EV/boe 5.5x) 66
D3 (EV/boe 5.5x) 73
D9 (EV/boe 5.5x) 43
Shale gas ventures (EV/boe 3.5x) 70
Other prospective basins 68
Retail 30
Investment/Others 44
Total EV 1,270
Net debt (110)
Equity value (`) 1,160
Source: Company, Angel Research
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