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RIL-BP deal reduces concerns on E&P
RIL proposed a 30% stake sale to BP in 23 of its E&P blocks in India at US$7.2bn
and an exploration success-based payment of US$1.8bn. Factoring in the
proposed deal, we reduce our valuation for RIL by 4% to INR1,150 per share from
INR1,200. However, more importantly for RIL, this derisks its exploration portfolio
and could accelerate the exploration programme with the help of BP’s deepwater
exploration expertise. Reiterate Buy
RIL proposes to sell 30% of its E&P
RIL agreed to sell a 30% stake in 23 of its E&P blocks in India to BP at US$7.2bn
and an exploration success-based payment of US$1.8bn, a 9% discount to our
INR525 per share NPV carried in our valuation for RIL’s E&P. Accordingly, we
reduce our SOTP-based target price for RIL from INR1,200 to INR1,150.
Completion of the proposed deal could accelerate RIL’s exploration programme,
targeting the prospective MND4, KGD9 and KGD3 blocks, which slowed down
recently. BP’s technical expertise for deepwater exploration and development
should also benefit Reliance.
Strong downstream margins to benefit RIL
Driven by strong global demand and higher utilisation rates, downstream margins
should be robust in FY12/13. With more than two-thirds of its operating profit
contributed by refining and petrochemicals, RIL will likely be a key beneficiary of
this trend. We forecast RIL’s GRM at US$9.4/bbl for FY12 and US$9.8/bbl for
FY13.
Reiterate Buy with INR1,150 target price; worsening global economy key risk
We reiterate our Buy rating on the stock with a target price of INR1,150 per share.
Our SOTP-based target price uses 7.5x FY12E EV/EBITDA for refining and
petrochemicals and a DCF (WACC 10.2%) for KGD6 and exploration upside
potential. Risks are 1) a worsening global economy that could hurt refining and
petrochemical demand, 2) production outages, and 3) policy vagaries
Derisking E&P portfolio
RIL to sell 30% stake in 23 oil and gas blocks in India to BP
Reliance Industries (RIL) announced that it will be selling a 30% stake in its 23 NELP oil and
gas blocks in India to BP. BP will pay RIL an aggregate consideration of US$7.2bn, and
completion adjustments, for the interests to be acquired in the 23 production sharing
contracts. Future performance payments of up to US$1.8bn could be paid based on
exploration success that results in development of commercial discoveries. The deal includes
the already producing field KGD6, apart from other prospective blocks like MND4, KGD9 and
KGD3.
RIL and BP also plan to form a 50:50 joint venture (JV) for the sourcing and marketing of gas
in India. Including the consideration paid for the acquisition and performance payments, BP
estimates total investment to amount to US$20bn, implying its share of future capex at
US$11bn in upstream and midstream.
The potential deal value of US$9bn is at a 9% discount to the INR525 per share NPV earlier
carried in our valuation for RIL’s E&P. Accordingly, we reduce our SOTP-based target price
valuation by 4% for RIL from INR1200 to INR1150.
Implied valuation for E&P lower than our estimate
The amount of US$7.2bn paid by BP for a 30% stake in RIL’s 23 blocks implies a valuation of
US$24bn for these blocks and US$21.6 for RIL’s pre-deal share in these blocks. If we include
the US$1.8bn to be paid in case of commercial discoveries from these blocks, the implied
valuation comes to US$27bn for RIL’s pre-deal share. This compares with our valuation of
US$29.7bn for these 23 blocks including exploration upside potential.
Factoring in the proposed deal, our valuation for RIL reduces by 4% to INR1150 per share.
This is because of the slightly lower implied value for the deal as against our valuation of the
E&P business. But more importantly for RIL, while the selling down of its E&P stake at a
reasonable valuation reduces the inherent risk of the exploration business, it also provides
access to BP’s deepwater exploration and development capabilities. In addition, it helps
alleviate investor concerns on the value of RIL’s E&P segment as technical challenges in the
reservoir have led to lower-than-expected gas production from KGD6. In our opinion, the deal
provides a floor for value of RIL’s E&P segment.
RIL’s tax liability seems unclear when considering this deal. We understand that if RIL has to
pay any capital gains tax, it will likely be calculated after reducing the amount of capital
invested on these 23 blocks by RIL so far. As of December 2010, RIL had capital employed
of about US$12.5bn in its oil & gas segment. While RIL has agreed that the deal will likely
need to be approved by the government, we are not yet clear on the timeline of the deal.
However, we understand that RIL expects to receive all government approvals and BP’s cash
consideration of US$7.2bn in FY12.
What will RIL do with all this cash?
RIL consolidated net debt of US$10.9bn in FY10. RIL is generating operational cash flow of
about US$7.5bn annualized as per its Q3FY11 reported results. With cash inflow of US$7.2bn
from this deal, RIL is likely to turn net cash positive in FY12 to the extent of ~US$5bn, even
after factoring in its announced capex plans. We expect RIL to deploy this cash in inorganic
growth opportunities, as has been its announced intention in the past. If RIL does not deploy
this cash favourably, its RoE could be adversely affected.
Valuation and risks
We value RIL at INR1150/sh on an SOTP basis using EV/E for refining and petrochemicals and
DCF for E&P business. We use an EV/EBITDA of 7.5x FY12E for the refining and
petrochemicals segment. We value KGD6 on DCF using a 10.2% WACC, based on Deutsche
Bank's cost of equity assumptions for India (risk-free rate of 6.4% and market risk premium
of 7.2%), beta of 1.0 (three-year average), post-tax cost of debt of 5.3% and target
debt/capital of 40%. Our value for RIL's E&P segment includes the value of KGD6, NEC25
and prospective resources.
We reiterate Buy on RIL on our expectation of a strong refining and petrochemicals margin in
FY12/13. With more than two-thirds of RIL’s operating profit currently being contributed by
refining and petrochemicals, RIL should benefit from improvement in downstream margins
over FY11/13. Deutsche Bank is now Overweight on Asia refining and expects Singapore
Complex GRMs in CY11 to average US$6/bbl, up 28% yoy, and US$6.6/bbl in CY12 and
CY13. We forecast RIL’s GRM at US$9.4/bbl for FY12 and US$9.8/bbl for FY13. RIL’s refining
margins should also receive continued support from improved light-heavy crude differential in
FY12. We expect a Dubai–Arab heavy crude differential of ~US$2.5-3/bbl in 2011E and
2012E.
After a year of record ethylene capacity additions, we see incremental global capacity
additions falling below demand growth over 2011-14. As utilization levels improve for
ethylene crackers, petrochemical margins should also rise through 2HCY11-2013. The
announced capacity expansions by RIL in PX, PTA and olefins are likely to be commissioned
over 1HFY13-FY15. The stock is trading at 7.4x FY12E EV/EBITDA, which is at the lower end
of its three-year trading range as well as at a discount of 10-15% to regional peers.
Risks: We believe any change in the regulatory environment of the oil and gas sector and a
downturn in global commodity prices/margins are risks for RIL. Exploration and production
activities face risks such as volatility in oil and natural gas prices, as well as operational,
financial, geological and meteorological issues. Any further delay in ramp-up of KGD6 gas
production poses another significant risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RIL-BP deal reduces concerns on E&P
RIL proposed a 30% stake sale to BP in 23 of its E&P blocks in India at US$7.2bn
and an exploration success-based payment of US$1.8bn. Factoring in the
proposed deal, we reduce our valuation for RIL by 4% to INR1,150 per share from
INR1,200. However, more importantly for RIL, this derisks its exploration portfolio
and could accelerate the exploration programme with the help of BP’s deepwater
exploration expertise. Reiterate Buy
RIL proposes to sell 30% of its E&P
RIL agreed to sell a 30% stake in 23 of its E&P blocks in India to BP at US$7.2bn
and an exploration success-based payment of US$1.8bn, a 9% discount to our
INR525 per share NPV carried in our valuation for RIL’s E&P. Accordingly, we
reduce our SOTP-based target price for RIL from INR1,200 to INR1,150.
Completion of the proposed deal could accelerate RIL’s exploration programme,
targeting the prospective MND4, KGD9 and KGD3 blocks, which slowed down
recently. BP’s technical expertise for deepwater exploration and development
should also benefit Reliance.
Strong downstream margins to benefit RIL
Driven by strong global demand and higher utilisation rates, downstream margins
should be robust in FY12/13. With more than two-thirds of its operating profit
contributed by refining and petrochemicals, RIL will likely be a key beneficiary of
this trend. We forecast RIL’s GRM at US$9.4/bbl for FY12 and US$9.8/bbl for
FY13.
Reiterate Buy with INR1,150 target price; worsening global economy key risk
We reiterate our Buy rating on the stock with a target price of INR1,150 per share.
Our SOTP-based target price uses 7.5x FY12E EV/EBITDA for refining and
petrochemicals and a DCF (WACC 10.2%) for KGD6 and exploration upside
potential. Risks are 1) a worsening global economy that could hurt refining and
petrochemical demand, 2) production outages, and 3) policy vagaries
Derisking E&P portfolio
RIL to sell 30% stake in 23 oil and gas blocks in India to BP
Reliance Industries (RIL) announced that it will be selling a 30% stake in its 23 NELP oil and
gas blocks in India to BP. BP will pay RIL an aggregate consideration of US$7.2bn, and
completion adjustments, for the interests to be acquired in the 23 production sharing
contracts. Future performance payments of up to US$1.8bn could be paid based on
exploration success that results in development of commercial discoveries. The deal includes
the already producing field KGD6, apart from other prospective blocks like MND4, KGD9 and
KGD3.
RIL and BP also plan to form a 50:50 joint venture (JV) for the sourcing and marketing of gas
in India. Including the consideration paid for the acquisition and performance payments, BP
estimates total investment to amount to US$20bn, implying its share of future capex at
US$11bn in upstream and midstream.
The potential deal value of US$9bn is at a 9% discount to the INR525 per share NPV earlier
carried in our valuation for RIL’s E&P. Accordingly, we reduce our SOTP-based target price
valuation by 4% for RIL from INR1200 to INR1150.
Implied valuation for E&P lower than our estimate
The amount of US$7.2bn paid by BP for a 30% stake in RIL’s 23 blocks implies a valuation of
US$24bn for these blocks and US$21.6 for RIL’s pre-deal share in these blocks. If we include
the US$1.8bn to be paid in case of commercial discoveries from these blocks, the implied
valuation comes to US$27bn for RIL’s pre-deal share. This compares with our valuation of
US$29.7bn for these 23 blocks including exploration upside potential.
Factoring in the proposed deal, our valuation for RIL reduces by 4% to INR1150 per share.
This is because of the slightly lower implied value for the deal as against our valuation of the
E&P business. But more importantly for RIL, while the selling down of its E&P stake at a
reasonable valuation reduces the inherent risk of the exploration business, it also provides
access to BP’s deepwater exploration and development capabilities. In addition, it helps
alleviate investor concerns on the value of RIL’s E&P segment as technical challenges in the
reservoir have led to lower-than-expected gas production from KGD6. In our opinion, the deal
provides a floor for value of RIL’s E&P segment.
RIL’s tax liability seems unclear when considering this deal. We understand that if RIL has to
pay any capital gains tax, it will likely be calculated after reducing the amount of capital
invested on these 23 blocks by RIL so far. As of December 2010, RIL had capital employed
of about US$12.5bn in its oil & gas segment. While RIL has agreed that the deal will likely
need to be approved by the government, we are not yet clear on the timeline of the deal.
However, we understand that RIL expects to receive all government approvals and BP’s cash
consideration of US$7.2bn in FY12.
What will RIL do with all this cash?
RIL consolidated net debt of US$10.9bn in FY10. RIL is generating operational cash flow of
about US$7.5bn annualized as per its Q3FY11 reported results. With cash inflow of US$7.2bn
from this deal, RIL is likely to turn net cash positive in FY12 to the extent of ~US$5bn, even
after factoring in its announced capex plans. We expect RIL to deploy this cash in inorganic
growth opportunities, as has been its announced intention in the past. If RIL does not deploy
this cash favourably, its RoE could be adversely affected.
Valuation and risks
We value RIL at INR1150/sh on an SOTP basis using EV/E for refining and petrochemicals and
DCF for E&P business. We use an EV/EBITDA of 7.5x FY12E for the refining and
petrochemicals segment. We value KGD6 on DCF using a 10.2% WACC, based on Deutsche
Bank's cost of equity assumptions for India (risk-free rate of 6.4% and market risk premium
of 7.2%), beta of 1.0 (three-year average), post-tax cost of debt of 5.3% and target
debt/capital of 40%. Our value for RIL's E&P segment includes the value of KGD6, NEC25
and prospective resources.
We reiterate Buy on RIL on our expectation of a strong refining and petrochemicals margin in
FY12/13. With more than two-thirds of RIL’s operating profit currently being contributed by
refining and petrochemicals, RIL should benefit from improvement in downstream margins
over FY11/13. Deutsche Bank is now Overweight on Asia refining and expects Singapore
Complex GRMs in CY11 to average US$6/bbl, up 28% yoy, and US$6.6/bbl in CY12 and
CY13. We forecast RIL’s GRM at US$9.4/bbl for FY12 and US$9.8/bbl for FY13. RIL’s refining
margins should also receive continued support from improved light-heavy crude differential in
FY12. We expect a Dubai–Arab heavy crude differential of ~US$2.5-3/bbl in 2011E and
2012E.
After a year of record ethylene capacity additions, we see incremental global capacity
additions falling below demand growth over 2011-14. As utilization levels improve for
ethylene crackers, petrochemical margins should also rise through 2HCY11-2013. The
announced capacity expansions by RIL in PX, PTA and olefins are likely to be commissioned
over 1HFY13-FY15. The stock is trading at 7.4x FY12E EV/EBITDA, which is at the lower end
of its three-year trading range as well as at a discount of 10-15% to regional peers.
Risks: We believe any change in the regulatory environment of the oil and gas sector and a
downturn in global commodity prices/margins are risks for RIL. Exploration and production
activities face risks such as volatility in oil and natural gas prices, as well as operational,
financial, geological and meteorological issues. Any further delay in ramp-up of KGD6 gas
production poses another significant risk.
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