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Reliance Industries
De-risking the E&P business
BP takes stake in RIL’s E&P business: BP yesterday
announced it will buy a 30% stake in 23 oil & gas PSCs
currently being operated by RIL in India, including the
producing KG D6 block for a total consideration of
US$7.2bn. RIL could also receive future performance
payments of up to US$1.8 bn based on further
exploration success, which could take the deal value to
~US$9bn. Our discussion with RIL suggests that CBM
blocks, Shale gas assets, PMT fields, 14 international
blocks, and 6 domestic blocks are not part of this deal.
Deal crystallizes a value of Rs414/share for RIL’s
E&P business: Based on a deal value of US$7.2bn, the
23 blocks are worth US$24bn, or Rs331/share. However,
if we were to include the contingent payment of
US$1.8bn assuming exploration success, the value
comes in at US$30bn or Rs414/share. Further, we value
RIL’s CBM, Shale Gas and PMT assets at ~Rs92/share;
including these the deal underpins value of Rs506/share
for RIL’s E&P business. However, compared to our
target value of Rs600/share, this leaves an upside of
Rs94/share from 20 other blocks (14 international and 6
domestic), which could be slightly on the higher side
considering the lack of any information on these blocks.
However, we highlight that that by leveraging BP’s
technical capabilities RIL could enhance the valuation of
existing assets thereby partially capturing the value gap.
What’s in the Price? At current levels, we believe the
market is discounting Rs305/share for E&P business as
compared to potential value of Rs506/share, indicating
potential upside of Rs201/share from the current levels.
What does this mean to our estimates? RIL is
currently producing ~51mmscmd of gas vs. our
assumption of 60mmscmd in F2012. Assuming 51
mmscmd in our numbers, earnings could do down by
6%. However we believe this will largely be negated by
upside from strong petchem netbacks and stronger
GRMs which are currently at US$10.7/bbl for RIL (our
assumption of US$9/bbl). Every dollar increase in GRMs
increases RIL’s earnings by 8%, similarly, a 10%
increase in Petrochemical netbacks increases earnings
by 7% for F2012.
RIL: Field wise NAV break-up
Field NAV (US$Million) Rs/share
KG Basin 15,663 216
NEC-25 1,907 26
CBM 1,921 26
PMT 3,534 49
Shale Gas 1,230 17
Total 24,256 335
Source: Company data, Morgan Stanley Research estimates
Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as
financial advisor to BP plc ("BP") in relation to the proposed
partnership with Reliance Industries Limited as announced on
21 February 2011. BP has agreed to pay fees to Morgan
Stanley for its financial services. Please refer to the notes at
the end of the report.
Valuation methodology
Our price target is based on a sum-of-the-parts valuation
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.7x, which is the average of its global refining
peers. We value the R&M business at Rs310 per share.
2) The petrochemicals business valuation is based on an
average F2012 EV/EBITDA of 8x. We value the Petrochemical
business at Rs283 per share.
3) With the first oil production started and gas production
begun at its KG basin fields, we use a P/CEPS target
multiple-based valuation for RIL’s E&P business. We assign a
target multiple of 8.3x to our average projected cash profits of
US$5.2billion (F2012-16E) for global comps, in line with the
normalized average global multiples for E&P companies for
F2012e. Based on this, we arrive at a fair value of US$43.5
billion, or Rs600 per share, for RIL’s E&P business.
4) We have valued RIL’s investments at F2011e book value
which includes RIL’s investment in telecom business. We also
value RIL’s treasury shares at ~US$6.7bn or Rs92/share.
After, deducting F2011e net-debt of Rs145/share, we arrive at
SOTP Value of Rs1252/share.
.
We see the following key risks to our price target
1) The stock’s historical correlation with the market of 0.85x -
hence a market correction would impact RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to a
seven-year tax holiday, the Ministry of Petroleum recently
published a circular suggesting the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$6.7bn.
4) Potential delays in the execution of the company’s business
plan.
5) A significant oil/gas discovery could lead to increase in
reserve and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets could
lead to downward revision to resource estimates and hence a
negative impact on our price target.
6) A sharp decline in global economic growth that would likely
compress our projected petrochemical and refining
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
De-risking the E&P business
BP takes stake in RIL’s E&P business: BP yesterday
announced it will buy a 30% stake in 23 oil & gas PSCs
currently being operated by RIL in India, including the
producing KG D6 block for a total consideration of
US$7.2bn. RIL could also receive future performance
payments of up to US$1.8 bn based on further
exploration success, which could take the deal value to
~US$9bn. Our discussion with RIL suggests that CBM
blocks, Shale gas assets, PMT fields, 14 international
blocks, and 6 domestic blocks are not part of this deal.
Deal crystallizes a value of Rs414/share for RIL’s
E&P business: Based on a deal value of US$7.2bn, the
23 blocks are worth US$24bn, or Rs331/share. However,
if we were to include the contingent payment of
US$1.8bn assuming exploration success, the value
comes in at US$30bn or Rs414/share. Further, we value
RIL’s CBM, Shale Gas and PMT assets at ~Rs92/share;
including these the deal underpins value of Rs506/share
for RIL’s E&P business. However, compared to our
target value of Rs600/share, this leaves an upside of
Rs94/share from 20 other blocks (14 international and 6
domestic), which could be slightly on the higher side
considering the lack of any information on these blocks.
However, we highlight that that by leveraging BP’s
technical capabilities RIL could enhance the valuation of
existing assets thereby partially capturing the value gap.
What’s in the Price? At current levels, we believe the
market is discounting Rs305/share for E&P business as
compared to potential value of Rs506/share, indicating
potential upside of Rs201/share from the current levels.
What does this mean to our estimates? RIL is
currently producing ~51mmscmd of gas vs. our
assumption of 60mmscmd in F2012. Assuming 51
mmscmd in our numbers, earnings could do down by
6%. However we believe this will largely be negated by
upside from strong petchem netbacks and stronger
GRMs which are currently at US$10.7/bbl for RIL (our
assumption of US$9/bbl). Every dollar increase in GRMs
increases RIL’s earnings by 8%, similarly, a 10%
increase in Petrochemical netbacks increases earnings
by 7% for F2012.
RIL: Field wise NAV break-up
Field NAV (US$Million) Rs/share
KG Basin 15,663 216
NEC-25 1,907 26
CBM 1,921 26
PMT 3,534 49
Shale Gas 1,230 17
Total 24,256 335
Source: Company data, Morgan Stanley Research estimates
Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as
financial advisor to BP plc ("BP") in relation to the proposed
partnership with Reliance Industries Limited as announced on
21 February 2011. BP has agreed to pay fees to Morgan
Stanley for its financial services. Please refer to the notes at
the end of the report.
Valuation methodology
Our price target is based on a sum-of-the-parts valuation
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.7x, which is the average of its global refining
peers. We value the R&M business at Rs310 per share.
2) The petrochemicals business valuation is based on an
average F2012 EV/EBITDA of 8x. We value the Petrochemical
business at Rs283 per share.
3) With the first oil production started and gas production
begun at its KG basin fields, we use a P/CEPS target
multiple-based valuation for RIL’s E&P business. We assign a
target multiple of 8.3x to our average projected cash profits of
US$5.2billion (F2012-16E) for global comps, in line with the
normalized average global multiples for E&P companies for
F2012e. Based on this, we arrive at a fair value of US$43.5
billion, or Rs600 per share, for RIL’s E&P business.
4) We have valued RIL’s investments at F2011e book value
which includes RIL’s investment in telecom business. We also
value RIL’s treasury shares at ~US$6.7bn or Rs92/share.
After, deducting F2011e net-debt of Rs145/share, we arrive at
SOTP Value of Rs1252/share.
.
We see the following key risks to our price target
1) The stock’s historical correlation with the market of 0.85x -
hence a market correction would impact RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to a
seven-year tax holiday, the Ministry of Petroleum recently
published a circular suggesting the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$6.7bn.
4) Potential delays in the execution of the company’s business
plan.
5) A significant oil/gas discovery could lead to increase in
reserve and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets could
lead to downward revision to resource estimates and hence a
negative impact on our price target.
6) A sharp decline in global economic growth that would likely
compress our projected petrochemical and refining
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