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Reliance Industries (RELI.BO)
Buy Equity Research
E&P deal brings deepwater expertise, valuation and cash for RIL
What's changed
Reliance Industries (RIL) today announced a deal with BP Plc (BP.L), whereby
BP will take a 30% stake in RIL’s 23 E&P assets in India and also form a 50:50
joint venture for the sourcing and marketing of natural gas/LNG in India. BP is
paying RIL cash of US$7.2bn for the E&P stakes and would pay another
US$1.8bn in a phased manner based on commercial success and
development of the exploration blocks. During its earnings call, BP noted that
they are getting net around 1 bn boe of discovered resources and up to 1.5 bn
boe including risked exploration resources. The deal is currently awaiting
regulatory approvals from Indian and UK governments.
Implications
We believe that through this deal RIL primarily would get access to BP’s
deepwater expertise, which it needs for tackling the technical issues in the
sub-surface of D-6 block. Based on the prices paid by BP, the deal values RIL’s
new E&P business at around US$25bn. In our SOTP valuation, we value the
same assets at US$29bn, including potential upside from further capex that
BP-RIL has committed. Moreover, BP’s capex commitment and potential
milestone payments effectively give fresh impetus to RIL’s E&P business, in
our view. RIL has also partially de-risked its E&P portfolio, in our view, as the
cash from the deal could partly fund RIL’s future exploration capex.
Valuation
We reiterate Conviction Buy on RIL with a SOTP-based 12-m TP of Rs1,250,
implying 30% potential upside. We see compelling risk-reward at current
levels as we estimate the stock is not pricing in the cyclical upswing in refining
and potential recovery in ethylene cycle. Even assuming flat E&P volume in
FY12E, we are about 10% ahead of RIL’s Bloomberg consensus earnings due
to better refining estimates and weaker INR-US$ forecasts. The stock is
currently trading at 11.1x FY12E EPS against historical band of 4x-33x.
Key risks
1) Delay in ethylene recovery; 2) expensive acquisitions; 3) weak refining.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RELI.BO)
Buy Equity Research
E&P deal brings deepwater expertise, valuation and cash for RIL
What's changed
Reliance Industries (RIL) today announced a deal with BP Plc (BP.L), whereby
BP will take a 30% stake in RIL’s 23 E&P assets in India and also form a 50:50
joint venture for the sourcing and marketing of natural gas/LNG in India. BP is
paying RIL cash of US$7.2bn for the E&P stakes and would pay another
US$1.8bn in a phased manner based on commercial success and
development of the exploration blocks. During its earnings call, BP noted that
they are getting net around 1 bn boe of discovered resources and up to 1.5 bn
boe including risked exploration resources. The deal is currently awaiting
regulatory approvals from Indian and UK governments.
Implications
We believe that through this deal RIL primarily would get access to BP’s
deepwater expertise, which it needs for tackling the technical issues in the
sub-surface of D-6 block. Based on the prices paid by BP, the deal values RIL’s
new E&P business at around US$25bn. In our SOTP valuation, we value the
same assets at US$29bn, including potential upside from further capex that
BP-RIL has committed. Moreover, BP’s capex commitment and potential
milestone payments effectively give fresh impetus to RIL’s E&P business, in
our view. RIL has also partially de-risked its E&P portfolio, in our view, as the
cash from the deal could partly fund RIL’s future exploration capex.
We reiterate Conviction Buy on RIL with a SOTP-based 12-m TP of Rs1,250,
implying 30% potential upside. We see compelling risk-reward at current
levels as we estimate the stock is not pricing in the cyclical upswing in refining
and potential recovery in ethylene cycle. Even assuming flat E&P volume in
FY12E, we are about 10% ahead of RIL’s Bloomberg consensus earnings due
to better refining estimates and weaker INR-US$ forecasts. The stock is
currently trading at 11.1x FY12E EPS against historical band of 4x-33x.
Key risks
1) Delay in ethylene recovery; 2) expensive acquisitions; 3) weak refining.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
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