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Reliance Industries Ltd.
BP acquiring 30% in RIL’s E&P
assets to help re-rate RIL’s E&P
„BP to take 30% stake in RIL’s 23 oil & gas blocks; Buy
Reliance Industries (RIL) and BP Plc (BP) today announced that BP will take 30%
interest in 23 oil & gas blocks in India including the producing KG D6 block. The
implied value of RIL’s E&P assets (based on consideration BP is paying for 30%
stake) is in line with our valuation of RIL’s E&P. However, RIL’s share price
factors a much lower valuation. This deal should help re-rate RIL’s E&P valuation.
To pay US$7.2bn for 30% stake; may pay another US$1.8bn
BP will acquire 30% stake in 23 oil & gas blocks including 19 in India’s eastern
offshore region. BP will pay US$7.2bn for 30% interest in the 23 blocks. BP may
also pay another US$1.8bn as future performance payments based on
exploration success that results in development of commercial discoveries.
Implied value US$22-29bn; E&P valued by us at US$26bn
BP would pay US$7.2-9.0bn for 30% stake implying value of US$27-30bn for
100% stake and US$23.4-29.3bn for RIL’s 97.6% stake in these blocks. However,
most of the consideration of US$7.2bn BP will pay is likely to be for KG D6, in
which RIL has 90% stake. On that basis implied value works out to US$21.8-
27.2bn. We are valuing these assets at US$25.7bn (total E&P value US$32.9bn).
Share pricing in much lower value; deal to help re-rating
Problems with KG D6 ramp up and KG D9 dry wells meant RIL’s E&P valuation
was de-rated. RIL therefore did not participate in the refining and petrochemical
rally in the last 6 months. RIL’s share price (Rs956) is closer to our bear case fair
value of Rs923 (lower E&P) rather than base case (Rs1,193). We believe this
deal will bring in lot of benefits and also help re-rate RIL’s E&P valuation.
BP to take 30% stake in 23 blocks
BP to pay US$7.2bn for 30% stake in 23 blocks
May pay another US$1.8bn in case of exploration success
RIL and BP on February 21 announced a transformational partnership in India.
Relationship framework and transactional agreements were signed. As per press
release issued by RIL and BP
„ BP will take 30% interest in 23 oil & gas blocks in India including the
producing KG D6 block
„ BP will pay RIL US$7.2bn as consideration for 30% stake in these 23 blocks
„ BP could pay another US$1.8bn as future performance payments based on
exploration success that results in development of commercial discoveries
„ RIL and BP will also form a 50:50 joint venture (JV) for sourcing and
marketing of gas in India.
RIL to take stake in 23 blocks including producing KG D6
BP will acquire 30% stake in 23 oil & gas blocks including KG D6
BP will take stake in 19 blocks in eastern offshore region
Also in 2 Kerala-Konkan deepwater and 2 onshore blocks
BP will take stake in 23 blocks of RIL including
„ 19 blocks (18 deepwater and 1 shallow water) in the eastern offshore. This
includes the deepwater KG D6 and shallow water NEC-25 blocks, in which
commercial discoveries have been made
„ 2 deep-water Kerala-Konkan blocks
„ 2 onland blocks including the Cambay block in which RIL has made several
oil discoveries
BP already is RIL’s partner with 50% interest in a KG deepwater block allotted to
them in NELP VII.
BP has not taken stake in PMT, CBM and US Shale gas
RIL also has 30% interest in the producing pre-NELP blocks Panna, Mukta and
Tapti. It also has 5 CBM blocks in India including two, with gas resource of 3.5tcf.
RIL has also recently formed three US Shale gas JVs. BP will not take interest in
any of these E&P assets of RIL.
Implied value based on deal v/s our valuation
Implied value US$23.4-29.3bn
BP paying US$7.2bn for 30%; RIL has 97.6% on average in these blocks
BP will pay RIL consideration of US$7.2bn for 30% stake in its 23 oil & gas
blocks. In case of further exploration success resulting in development of
commercial discoveries BP could pay RIL another US$1.8bn. Thus the US$7.2-
9.0bn BP may pay RIL implies value of US$27-30bn for 100% stake in these
blocks. RIL currently has 97.6% stake in these blocks. Implied value of RIL’s
97.6% stake in these blocks is therefore US$23.4-29.3bn.
Implied value US$21.8-27.2bn if most value for KG D6
RIL’s 90% in KG D6 assumed to be valued at US$19bn
However, most of the consideration of US$7.2bn, which BP will pay RIL is likely
to be for the producing KG D6 block. RIL has 90% stake in KG D6 and 98%
average stake in the other 22 blocks.
We are valuing RIL’s 90% stake in KG D6 at US$19bn including US$16.9bn for
discoveries already made and US$2.2bn for exploration upside in the block.
Assuming BP is valuing KG D6 on a similar basis, US$6.35bn of its US$7.2bn
consideration may be for 30% in KG D6. It may thus be paying US$850m for 30%
interest in the other 22 blocks, in which RIL has 98% stake. Thus implied value of
100% stake in these blocks is US$2.85bn and implied value of RIL’s 98% stake is
US$2.8bn. Thus implied value of RIL’s 90% in KG D6 (US$19bn) and 98% in
other 22 blocks (US$2.8bn) works out to US$21.8bn.
If the exploration upside option of US$1.8bn, which BP may pay RIL is
considered, implied value of RIL’s stake in these blocks would rise to US$27.2bn.
RIL assets BP is taking stake in valued by us at US$26bn
Valuing PMT, CBM and US Shale gas at US$7bn; total E&P value US$33bn
We are valuing RIL’s stake in E&P assets, in which BP is taking stake, at
US$25.7bn. We are also valuing PMT, CBM and US Shale gas at US$7.2bn and
RIL’s total E&P assets at US$32.9bn.
Implied value US$22-29bn v/s our value of US$26bn
Thus the implied value of RIL’s E&P assets, in which BP is taking stake, is
US$22-29bn. We are valuing RIL’s stake in these assets at US$25.7bn. Thus our
valuation is in the middle of the implied valuation range.
Share pricing in much lower value
Share price (RS956) closer to bear case fair value
However RIL’s current share price factors a much lower valuation for RIL’s E&P
business in our view. RIL’s share price (Rs956) is closer to our bear case fair
value of Rs923 rather than base case fair value (Rs1,193). The main difference in
our base and bear case fair value is bear case E&P value of Rs279/share vis-à-
vis Rs508/share in the base case. In the bear case we have assumed
„ No value for future discoveries vis-à-vis Rs114/share in base case
„ KG D6 gas production remains at current levels (50-55mmscmd) and does
not ramp up to guided peak of 80mmscmd. This would mean hit of
Rs69/share
„ No tax holiday for gas production. This matter is being litigated
E&P de-rated in the last few months
Hit by KG D6 ramp up delay and KG D9 dry wells
RIL’s share price is closer to our bear case fair value rather than base case fair
value due to de-rating of E&P in out view. E&P has got de-rated in the last few
months (since July 2010) due to
„ Problems with KG D6 oil & gas ramp up
„ Both the exploration wells in KG D9 (touted to be highly prospective) being
unsuccessful
„ No significant discoveries in the last 2-3 years
De-rating of E&P valuation meant RIL did not participate in the refining and
petrochemical rally in the last 6 months.
Deal to help re-rating of RIL’s E&P
BP to bring deepwater exploration & development ability
We believe this deal will bring in lot of benefits. BP will bring to the table worldclass deepwater exploration and development capabilities.
Implied value on BP’s consideration higher than bear case
Also as discussed the current share price appears to be factoring bear case E&P
valuation. Implied value of RIL’s E&P assets based on consideration BP is paying
is closer to our base case E&P valuation rather than bear case. The deal will thus
help re-rate RIL’s E&P valuation
Deal to help reaffirm faith in RIL’s E&P
Deal to re-rate Indian E&P
The BP-RIL deal should thus help reaffirm investors’ faith in RIL’s E&P business,
which once was the jewel in its crown. The deal should thus help re-rate RIL’s
E&P. It is in fact good news for Indian E&P.
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs1,193 (GDR US$50.41) is based on a sum-of-the-parts valuation.
The value of the refining and petrochemical business, oil and gas reserves and
resources, as well as its retail business, is calculated on DCF basis, using a
WACC of 11.8pct. Refining and marketing (Rs431) is 33pct of our PO, E&P
valuation (Rs508) 39pct, petrochemicals (Rs333) 26pct and organized retail
(Rs19) 1pct. Downside risks are (1) 7-year income tax holiday being disallowed
on gas production, which would mean lower cash flow, profit and fair value, (2)
Lower-than-expected oil price. (3) Huge disappointments on the E&P front, as we
have valued exploration upside at Rs114/share, (4) Failure in the retail business
and (5) Decline in refining and petrochemical margins being steeper than
expected. Upside risks are (1) Refining and petrochemical margins being better
than expected, (2) Higher-than-expected oil price, (3) Higher-than-expected
reserve accretion in the next 12-24 months and (4) Large acquisitions that
increase fair value significantly.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd.
BP acquiring 30% in RIL’s E&P
assets to help re-rate RIL’s E&P
„BP to take 30% stake in RIL’s 23 oil & gas blocks; Buy
Reliance Industries (RIL) and BP Plc (BP) today announced that BP will take 30%
interest in 23 oil & gas blocks in India including the producing KG D6 block. The
implied value of RIL’s E&P assets (based on consideration BP is paying for 30%
stake) is in line with our valuation of RIL’s E&P. However, RIL’s share price
factors a much lower valuation. This deal should help re-rate RIL’s E&P valuation.
To pay US$7.2bn for 30% stake; may pay another US$1.8bn
BP will acquire 30% stake in 23 oil & gas blocks including 19 in India’s eastern
offshore region. BP will pay US$7.2bn for 30% interest in the 23 blocks. BP may
also pay another US$1.8bn as future performance payments based on
exploration success that results in development of commercial discoveries.
Implied value US$22-29bn; E&P valued by us at US$26bn
BP would pay US$7.2-9.0bn for 30% stake implying value of US$27-30bn for
100% stake and US$23.4-29.3bn for RIL’s 97.6% stake in these blocks. However,
most of the consideration of US$7.2bn BP will pay is likely to be for KG D6, in
which RIL has 90% stake. On that basis implied value works out to US$21.8-
27.2bn. We are valuing these assets at US$25.7bn (total E&P value US$32.9bn).
Share pricing in much lower value; deal to help re-rating
Problems with KG D6 ramp up and KG D9 dry wells meant RIL’s E&P valuation
was de-rated. RIL therefore did not participate in the refining and petrochemical
rally in the last 6 months. RIL’s share price (Rs956) is closer to our bear case fair
value of Rs923 (lower E&P) rather than base case (Rs1,193). We believe this
deal will bring in lot of benefits and also help re-rate RIL’s E&P valuation.
BP to take 30% stake in 23 blocks
BP to pay US$7.2bn for 30% stake in 23 blocks
May pay another US$1.8bn in case of exploration success
RIL and BP on February 21 announced a transformational partnership in India.
Relationship framework and transactional agreements were signed. As per press
release issued by RIL and BP
„ BP will take 30% interest in 23 oil & gas blocks in India including the
producing KG D6 block
„ BP will pay RIL US$7.2bn as consideration for 30% stake in these 23 blocks
„ BP could pay another US$1.8bn as future performance payments based on
exploration success that results in development of commercial discoveries
„ RIL and BP will also form a 50:50 joint venture (JV) for sourcing and
marketing of gas in India.
RIL to take stake in 23 blocks including producing KG D6
BP will acquire 30% stake in 23 oil & gas blocks including KG D6
BP will take stake in 19 blocks in eastern offshore region
Also in 2 Kerala-Konkan deepwater and 2 onshore blocks
BP will take stake in 23 blocks of RIL including
„ 19 blocks (18 deepwater and 1 shallow water) in the eastern offshore. This
includes the deepwater KG D6 and shallow water NEC-25 blocks, in which
commercial discoveries have been made
„ 2 deep-water Kerala-Konkan blocks
„ 2 onland blocks including the Cambay block in which RIL has made several
oil discoveries
BP already is RIL’s partner with 50% interest in a KG deepwater block allotted to
them in NELP VII.
BP has not taken stake in PMT, CBM and US Shale gas
RIL also has 30% interest in the producing pre-NELP blocks Panna, Mukta and
Tapti. It also has 5 CBM blocks in India including two, with gas resource of 3.5tcf.
RIL has also recently formed three US Shale gas JVs. BP will not take interest in
any of these E&P assets of RIL.
Implied value based on deal v/s our valuation
Implied value US$23.4-29.3bn
BP paying US$7.2bn for 30%; RIL has 97.6% on average in these blocks
BP will pay RIL consideration of US$7.2bn for 30% stake in its 23 oil & gas
blocks. In case of further exploration success resulting in development of
commercial discoveries BP could pay RIL another US$1.8bn. Thus the US$7.2-
9.0bn BP may pay RIL implies value of US$27-30bn for 100% stake in these
blocks. RIL currently has 97.6% stake in these blocks. Implied value of RIL’s
97.6% stake in these blocks is therefore US$23.4-29.3bn.
Implied value US$21.8-27.2bn if most value for KG D6
RIL’s 90% in KG D6 assumed to be valued at US$19bn
However, most of the consideration of US$7.2bn, which BP will pay RIL is likely
to be for the producing KG D6 block. RIL has 90% stake in KG D6 and 98%
average stake in the other 22 blocks.
We are valuing RIL’s 90% stake in KG D6 at US$19bn including US$16.9bn for
discoveries already made and US$2.2bn for exploration upside in the block.
Assuming BP is valuing KG D6 on a similar basis, US$6.35bn of its US$7.2bn
consideration may be for 30% in KG D6. It may thus be paying US$850m for 30%
interest in the other 22 blocks, in which RIL has 98% stake. Thus implied value of
100% stake in these blocks is US$2.85bn and implied value of RIL’s 98% stake is
US$2.8bn. Thus implied value of RIL’s 90% in KG D6 (US$19bn) and 98% in
other 22 blocks (US$2.8bn) works out to US$21.8bn.
If the exploration upside option of US$1.8bn, which BP may pay RIL is
considered, implied value of RIL’s stake in these blocks would rise to US$27.2bn.
RIL assets BP is taking stake in valued by us at US$26bn
Valuing PMT, CBM and US Shale gas at US$7bn; total E&P value US$33bn
We are valuing RIL’s stake in E&P assets, in which BP is taking stake, at
US$25.7bn. We are also valuing PMT, CBM and US Shale gas at US$7.2bn and
RIL’s total E&P assets at US$32.9bn.
Implied value US$22-29bn v/s our value of US$26bn
Thus the implied value of RIL’s E&P assets, in which BP is taking stake, is
US$22-29bn. We are valuing RIL’s stake in these assets at US$25.7bn. Thus our
valuation is in the middle of the implied valuation range.
Share pricing in much lower value
Share price (RS956) closer to bear case fair value
However RIL’s current share price factors a much lower valuation for RIL’s E&P
business in our view. RIL’s share price (Rs956) is closer to our bear case fair
value of Rs923 rather than base case fair value (Rs1,193). The main difference in
our base and bear case fair value is bear case E&P value of Rs279/share vis-à-
vis Rs508/share in the base case. In the bear case we have assumed
„ No value for future discoveries vis-à-vis Rs114/share in base case
„ KG D6 gas production remains at current levels (50-55mmscmd) and does
not ramp up to guided peak of 80mmscmd. This would mean hit of
Rs69/share
„ No tax holiday for gas production. This matter is being litigated
E&P de-rated in the last few months
Hit by KG D6 ramp up delay and KG D9 dry wells
RIL’s share price is closer to our bear case fair value rather than base case fair
value due to de-rating of E&P in out view. E&P has got de-rated in the last few
months (since July 2010) due to
„ Problems with KG D6 oil & gas ramp up
„ Both the exploration wells in KG D9 (touted to be highly prospective) being
unsuccessful
„ No significant discoveries in the last 2-3 years
De-rating of E&P valuation meant RIL did not participate in the refining and
petrochemical rally in the last 6 months.
Deal to help re-rating of RIL’s E&P
BP to bring deepwater exploration & development ability
We believe this deal will bring in lot of benefits. BP will bring to the table worldclass deepwater exploration and development capabilities.
Implied value on BP’s consideration higher than bear case
Also as discussed the current share price appears to be factoring bear case E&P
valuation. Implied value of RIL’s E&P assets based on consideration BP is paying
is closer to our base case E&P valuation rather than bear case. The deal will thus
help re-rate RIL’s E&P valuation
Deal to help reaffirm faith in RIL’s E&P
Deal to re-rate Indian E&P
The BP-RIL deal should thus help reaffirm investors’ faith in RIL’s E&P business,
which once was the jewel in its crown. The deal should thus help re-rate RIL’s
E&P. It is in fact good news for Indian E&P.
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs1,193 (GDR US$50.41) is based on a sum-of-the-parts valuation.
The value of the refining and petrochemical business, oil and gas reserves and
resources, as well as its retail business, is calculated on DCF basis, using a
WACC of 11.8pct. Refining and marketing (Rs431) is 33pct of our PO, E&P
valuation (Rs508) 39pct, petrochemicals (Rs333) 26pct and organized retail
(Rs19) 1pct. Downside risks are (1) 7-year income tax holiday being disallowed
on gas production, which would mean lower cash flow, profit and fair value, (2)
Lower-than-expected oil price. (3) Huge disappointments on the E&P front, as we
have valued exploration upside at Rs114/share, (4) Failure in the retail business
and (5) Decline in refining and petrochemical margins being steeper than
expected. Upside risks are (1) Refining and petrochemical margins being better
than expected, (2) Higher-than-expected oil price, (3) Higher-than-expected
reserve accretion in the next 12-24 months and (4) Large acquisitions that
increase fair value significantly.
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