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Reliance Industries (RIL)
Energy
Deal almost done but use of cash unclear. We see the announcement of the
proposed transfer of 30% stake in RIL’s 23 E&P assets for a consideration of US$7.2 bn
as modestly positive versus our estimates but below the street’s expectations. We are
not sure of the avenues available for RIL for deploying the large cash flows generating
from operations, along with the consideration from BP PLC. We retain our REDUCE
rating on the stock with a revised target price of `1,010 noting modest upside of 6%
versus potential upside of 11% in BSE-30 index.
BP PLC takes 30% in RIL’s E&P portfolio for US$7.2 bn
RIL has announced a transfer of 30% stake in 23 of its E&P blocks (see Exhibit 1) to BP PLC in
consideration of (1) cash payment of US$7.2 bn, which is likely to be received by end-FY2012E
and (2) performance payment of up to US$1.8 bn based on further exploration success that results
in development of commercial discoveries. The strategic partnership also involves formation of a
50:50 joint venture for sourcing and marketing of gas in India.
Deal value marginally higher versus our estimates but lower versus street expectations
Exhibit 2 gives our estimate of fair value of key RIL blocks which are included in the proposed
transaction. We highlight that that BP will pay US$7.2 bn for 30% stake in 23 blocks, which values
these blocks (in which stake is transferred) at US$24 bn. We note that this is modestly higher
versus our estimate of US$20.8 bn (100% basis) as value for the five key blocks (KG D-6, NEC-25,
MN D-4, KG D-3 and KG D-9). However, we note that the value ascribed to RIL’s business is lower
versus the street’s estimates which were factoring significant option value for potential E&P upside.
Deal will take time pending regulatory approvals
We note that the consummation of the deal is subject to regulatory approvals and we expect the
same to be completed by end-FY2012E. We note that the assets transferred under the proposed
transaction are governed by the terms of the production-sharing contracts (PSC) signed under
NELP (New Exploration Licensing Policy). Article 28.1 of the model PSC states, “Subject to the
terms of this Article and other terms of this Contract, any Party comprising the Contractor may
assign, or transfer, a part or all of its Participating Interest, with the prior written consent of the
Government, which consent shall not be unreasonably withheld.”
Article 28.6 of the model PSC also states that, ”In the event that the Government does not give its
consent or does not respond to a request for assignment or transfer by a Party comprising the
Contractor within one hundred and twenty (120) days of such request and receipt of all
information referred to in Article 28.3, consent shall be deemed to have been given by the
Government.”
Rationale for deal: BP’s technical expertise seems to be the only plausible reason
We are perplexed by the early monetization of E&P assets by RIL at a modest premium given
(1) significant cash flows in the near future from producing assets and (2) early stage of
exploration in several key assets with good potential for upside. We believe one of the
reasons for this could be BP PLC’s expertise in deepwater exploration, which could assist in
(1) overcoming the technical issues at RIL’s key KG D-6 block and (2) expediting the work in
other E&P assets which have seen significant slippages.
Cash deployment becomes a bigger concern with impending BP consideration
We expect RIL to generate US$11.3 bn as free cash flows in FY2011-12E. The cash balance
would be further boosted by the receipt of US$7.2 bn as cash compensation from BP PLC
for transfer of 30% stake in its E&P assets. We believe RIL would have to look at more
avenues with significant cash deployment to effectively utilize its likely large cash flow
generation. RIL has historically used its cash flows to fund new projects. However, its new
initiatives in India haven’t been very successful and it is looking at overseas acquisitions to
drive future growth. We believe that payment of higher dividends to shareholders would
help in enhancing shareholder value.
Revised earnings for transaction; target price revised to `1,010 from `990
We have revised our earnings estimates for FY2013E and FY2014E to `72 (-3.1 %) and `80
(-4.4%) reflecting (1) conclusion of the transaction by end-FY2012E and (2) receipt of
consideration from BP PLC in FY2012E. We discuss the key changes to our assumptions
behind our earnings model below:
Lower share of RIL from its E&P blocks. We have revised our net production volumes
from RIL’s blocks to adjust for 30% stake to be transferred to BP PLC. We note that this
only applies to RIL’s KG D-6 block for the next three years as gas production from other
blocks will likely start from FY2016E onwards
Receipt of consideration in FY2012E. We assume the consummation of the proposed
transaction and receipt of US$7.2 bn from BP by end-FY2012E, in line with the
management guidance
Taxation on proposed transaction. We highlight that RIL will be subject to capital gains
tax under the Income Tax Act, 1961. However, we have not accounted for the same
pending clarity from the management on it
We retain our REDUCE rating on the stock with a revised target price of `1,010 from `990
previously (see Exhibit 3); the upward revision of target price reflects (1) lower net debt due
to receipt of US$7.2 bn from BP PLC and (2) modestly higher valuation for E&P assets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
Deal almost done but use of cash unclear. We see the announcement of the
proposed transfer of 30% stake in RIL’s 23 E&P assets for a consideration of US$7.2 bn
as modestly positive versus our estimates but below the street’s expectations. We are
not sure of the avenues available for RIL for deploying the large cash flows generating
from operations, along with the consideration from BP PLC. We retain our REDUCE
rating on the stock with a revised target price of `1,010 noting modest upside of 6%
versus potential upside of 11% in BSE-30 index.
BP PLC takes 30% in RIL’s E&P portfolio for US$7.2 bn
RIL has announced a transfer of 30% stake in 23 of its E&P blocks (see Exhibit 1) to BP PLC in
consideration of (1) cash payment of US$7.2 bn, which is likely to be received by end-FY2012E
and (2) performance payment of up to US$1.8 bn based on further exploration success that results
in development of commercial discoveries. The strategic partnership also involves formation of a
50:50 joint venture for sourcing and marketing of gas in India.
Deal value marginally higher versus our estimates but lower versus street expectations
Exhibit 2 gives our estimate of fair value of key RIL blocks which are included in the proposed
transaction. We highlight that that BP will pay US$7.2 bn for 30% stake in 23 blocks, which values
these blocks (in which stake is transferred) at US$24 bn. We note that this is modestly higher
versus our estimate of US$20.8 bn (100% basis) as value for the five key blocks (KG D-6, NEC-25,
MN D-4, KG D-3 and KG D-9). However, we note that the value ascribed to RIL’s business is lower
versus the street’s estimates which were factoring significant option value for potential E&P upside.
Deal will take time pending regulatory approvals
We note that the consummation of the deal is subject to regulatory approvals and we expect the
same to be completed by end-FY2012E. We note that the assets transferred under the proposed
transaction are governed by the terms of the production-sharing contracts (PSC) signed under
NELP (New Exploration Licensing Policy). Article 28.1 of the model PSC states, “Subject to the
terms of this Article and other terms of this Contract, any Party comprising the Contractor may
assign, or transfer, a part or all of its Participating Interest, with the prior written consent of the
Government, which consent shall not be unreasonably withheld.”
Article 28.6 of the model PSC also states that, ”In the event that the Government does not give its
consent or does not respond to a request for assignment or transfer by a Party comprising the
Contractor within one hundred and twenty (120) days of such request and receipt of all
information referred to in Article 28.3, consent shall be deemed to have been given by the
Government.”
Rationale for deal: BP’s technical expertise seems to be the only plausible reason
We are perplexed by the early monetization of E&P assets by RIL at a modest premium given
(1) significant cash flows in the near future from producing assets and (2) early stage of
exploration in several key assets with good potential for upside. We believe one of the
reasons for this could be BP PLC’s expertise in deepwater exploration, which could assist in
(1) overcoming the technical issues at RIL’s key KG D-6 block and (2) expediting the work in
other E&P assets which have seen significant slippages.
Cash deployment becomes a bigger concern with impending BP consideration
We expect RIL to generate US$11.3 bn as free cash flows in FY2011-12E. The cash balance
would be further boosted by the receipt of US$7.2 bn as cash compensation from BP PLC
for transfer of 30% stake in its E&P assets. We believe RIL would have to look at more
avenues with significant cash deployment to effectively utilize its likely large cash flow
generation. RIL has historically used its cash flows to fund new projects. However, its new
initiatives in India haven’t been very successful and it is looking at overseas acquisitions to
drive future growth. We believe that payment of higher dividends to shareholders would
help in enhancing shareholder value.
Revised earnings for transaction; target price revised to `1,010 from `990
We have revised our earnings estimates for FY2013E and FY2014E to `72 (-3.1 %) and `80
(-4.4%) reflecting (1) conclusion of the transaction by end-FY2012E and (2) receipt of
consideration from BP PLC in FY2012E. We discuss the key changes to our assumptions
behind our earnings model below:
Lower share of RIL from its E&P blocks. We have revised our net production volumes
from RIL’s blocks to adjust for 30% stake to be transferred to BP PLC. We note that this
only applies to RIL’s KG D-6 block for the next three years as gas production from other
blocks will likely start from FY2016E onwards
Receipt of consideration in FY2012E. We assume the consummation of the proposed
transaction and receipt of US$7.2 bn from BP by end-FY2012E, in line with the
management guidance
Taxation on proposed transaction. We highlight that RIL will be subject to capital gains
tax under the Income Tax Act, 1961. However, we have not accounted for the same
pending clarity from the management on it
We retain our REDUCE rating on the stock with a revised target price of `1,010 from `990
previously (see Exhibit 3); the upward revision of target price reflects (1) lower net debt due
to receipt of US$7.2 bn from BP PLC and (2) modestly higher valuation for E&P assets.
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