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Reliance Industries Ltd Overweight
RELI.BO, RIL IN
BP deal validates E&P value - Reiterate OW
• BP to take 30% stake in E&P assets: RIL announced that BP would
take a 30% stake in 23 oil & gas fields, including KG-D6, for a total
consideration of $7.2B. Further payments of up to $1.8B would be made
if exploratory successes lead to commercial production. After regulatory
approval, RIL will receive staggered payments over FY12.
• JV for sourcing and marketing: RIL and BP will form a 50:50 JV for
the sourcing, receiving and marketing of natural gas in India. The JV
will build infrastructure to receive and distribute gas; we expect this
would involve the creation of LNG assets and potential involvement in
CGD business.
• Deal validates value of E&P business: The deal values RIL's E&P
business at US$24-30B – this validates our estimate value for RIL’s
quantified east coast assets (US$19B) and also builds value for the
unquantified discoveries off the east coast.
• What BP brings to the table: RIL is a relatively young player in E&P,
and through this deal would be able to leverage BP’s expertise in
deepwater exploration and production. BP’s involvement will also
validate development spending and internationalize the gas pricing issue.
• Cash overhang to remain: The deal will boost RIL’s already large cash
balance (~US$7.1B). Uncertainty on the use of this cash will remain an
overhang on the stock, in our view.
• Reiterate OW: We take a positive view of the deal, as it validates the
value of RIL's E&P portfolio and should be a catalyst for stock
performance. The partnership with BP will address concerns on potential
production ramp-up/reservoir quality issues. We reiterate our Overweight
rating on the stock, and maintain our Dec-11 price target of Rs1,240
(based on 12.5x adjusted earnings, slightly higher than the historical
average due to improving earnings mix).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd Overweight
RELI.BO, RIL IN
BP deal validates E&P value - Reiterate OW
• BP to take 30% stake in E&P assets: RIL announced that BP would
take a 30% stake in 23 oil & gas fields, including KG-D6, for a total
consideration of $7.2B. Further payments of up to $1.8B would be made
if exploratory successes lead to commercial production. After regulatory
approval, RIL will receive staggered payments over FY12.
• JV for sourcing and marketing: RIL and BP will form a 50:50 JV for
the sourcing, receiving and marketing of natural gas in India. The JV
will build infrastructure to receive and distribute gas; we expect this
would involve the creation of LNG assets and potential involvement in
CGD business.
• Deal validates value of E&P business: The deal values RIL's E&P
business at US$24-30B – this validates our estimate value for RIL’s
quantified east coast assets (US$19B) and also builds value for the
unquantified discoveries off the east coast.
• What BP brings to the table: RIL is a relatively young player in E&P,
and through this deal would be able to leverage BP’s expertise in
deepwater exploration and production. BP’s involvement will also
validate development spending and internationalize the gas pricing issue.
• Cash overhang to remain: The deal will boost RIL’s already large cash
balance (~US$7.1B). Uncertainty on the use of this cash will remain an
overhang on the stock, in our view.
• Reiterate OW: We take a positive view of the deal, as it validates the
value of RIL's E&P portfolio and should be a catalyst for stock
performance. The partnership with BP will address concerns on potential
production ramp-up/reservoir quality issues. We reiterate our Overweight
rating on the stock, and maintain our Dec-11 price target of Rs1,240
(based on 12.5x adjusted earnings, slightly higher than the historical
average due to improving earnings mix).
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