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For a better tomorrow
§ BP to acquire 30% in 23 RIL-operated blocks for USD7.2b
§ Compared to our estimates deal at fair value, not a premium
§ Increases investor confidence, E&P back in the spotlight
§ Upgrade to BUY with unchanged TP of INR1,077
BP brings KG-basin back to life
BP and RIL have entered into an
agreement whereby BP will acquire a
30% stake in 23 blocks with active
Production Sharing Contracts (PSCs). RIL
will continue to be the operator. The deal
also includes a 50:50 JV to source and
market gas in India. The success of the
deal is subject to regulatory approval from
the Government of India as well as other
customary conditions. Based on our
estimates of RIL’s E&P business valuation
we believe BP has paid a fair value for its
stake in RIL’s blocks (Exhibit 3). While we
are slightly disappointed by the fact that
RIL did not manage to receive a premium for its KG basin acreage, the
BP deal provides a lot of comfort with regard to the future of the KGbasin. In the long run we believe BP’s expertise will improve RIL’s
success rate as well as assisting in curtailing the decline at KG-D6.
Deal restores investor confidence in RIL’s E&P business
Declines in KG-D6 production levels were one of the key overhangs on
the shares and RIL’s unwillingness to provide clarity had hurt investor
sentiment. With the BP deal, RIL has gone ahead and taken measures to
boost future E&P activity by partnering with a more technologically
competent and experienced E&P player. We believe investors will now
overlook the near-term production shortfall in KG-D6 and focus on the
potential upside from the E&P business in partnership with BP.
E&P concerns make way for refining & petchem upside
With E&P concerns taking a back seat, at least for the near term, RIL’s
strength in refining and petchem should finally come to light and assist in
providing further upside from current levels. RIL stock has been one of
the few Asian stocks that has not outperformed, on back of strength seen
in the refining and petchem margins since the start of 2HFY11.
Upgrade to BUY, use of cash remains a concern
We are upgrading the shares of RIL from a HOLD to a BUY with
unchanged SoTP-based TP of INR1,077. While we do expect the shares
to rally in the near term we would not be buyers beyond the INR1,050
mark as then we would wait to get some incremental news flow on E&P
developments that are more operational in nature. Our only concern from
the deal relates to the increasing cash pile at RIL and the company’s
plans to deploy the cash. Overall, we are now comfortable about RIL’s
E&P prospects. Risks: downturn in refining, potential delays to E&P
developments.
The risk experts
≠ Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
≠ With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
≠ This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
A look into valuation and assets as part of deal
In Exhibits 1 and 2 we provide a snapshot of 23 blocks covered as part of the deal,
which spans ~270,000 sq km and covers predominantly a deepwater and shallow
offshore profile across Krishna-Godavari (KG), Mahanadi, Cauvery, Palar, KeralaKonkan basins.
Valuation fair based on reported reserves; Optionality limited
We think the upfront payment of USD7.2b for a 30% stake in the 23 blocks operated by
RIL is a fair value and not a substantial premium. We show in Exhibit 3 that, based on
announced 2P and in-place reserve estimates for KG-D6 oil/gas/satellite fields,
Mahanadi NEC and KG-D3/D9, USD7.2b is a slight discount to our fair value estimate.
The additional USD1.8b payment could be an implied valuation for further discoveries in
the above blocks and could possibly include discovered but not appraised blocks like
Cauvery offshore and also undrilled prospects like Mahandai-D4 blocks. Based on our
estimates, we believe KG D3, D9 and MN-D4, which were considered to be highly
prospective blocks, have been ascribed low valuations primarily due to lack of success
in D9 and concerns surrounding production potential of KG D6.
Exhibit 3: Deal economics – Fairly valued deal, optionality given very little value
VALUATION AT 100% INTEREST (USD b) Comments
KG-D6 gas 13.54 è Valuing 18.8tcf, at implied EV/boe of USD4
KG-D6 oil 3.84 è Valuing 121m bbls at peak production 35000 bpd
KG-D6 Upside 1.98 è Valuing 4.45tcf at USD5/boe, and 50% recovery
NEC-25 1.61 è Valuing 3.7tcf at USD5/boe, and 50% recovery
Total 20.97
OTHER PROSPECTIVE BLOCKS
D3 * 1.70 è Valuing 3.9tcf at USD5/boe, and 50% recovery
D9 * 2.34 è Valuing 5.2tcf at USD5/boe, and 50% recovery
Sub-total 4.04
GROSS TOTAL 25.01
Implied value of 30% stake 7.50
BP's upfront payment 7.20
Discount (%) 4% è Deal valuation not a huge premium based on our estimates
+ Additional payment 1.80 è To be paid on further exploration success in the blocks acquired
* As reported by Hardy's independent audit estimates
Source: BNP Paribas estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
For a better tomorrow
§ BP to acquire 30% in 23 RIL-operated blocks for USD7.2b
§ Compared to our estimates deal at fair value, not a premium
§ Increases investor confidence, E&P back in the spotlight
§ Upgrade to BUY with unchanged TP of INR1,077
BP brings KG-basin back to life
BP and RIL have entered into an
agreement whereby BP will acquire a
30% stake in 23 blocks with active
Production Sharing Contracts (PSCs). RIL
will continue to be the operator. The deal
also includes a 50:50 JV to source and
market gas in India. The success of the
deal is subject to regulatory approval from
the Government of India as well as other
customary conditions. Based on our
estimates of RIL’s E&P business valuation
we believe BP has paid a fair value for its
stake in RIL’s blocks (Exhibit 3). While we
are slightly disappointed by the fact that
RIL did not manage to receive a premium for its KG basin acreage, the
BP deal provides a lot of comfort with regard to the future of the KGbasin. In the long run we believe BP’s expertise will improve RIL’s
success rate as well as assisting in curtailing the decline at KG-D6.
Deal restores investor confidence in RIL’s E&P business
Declines in KG-D6 production levels were one of the key overhangs on
the shares and RIL’s unwillingness to provide clarity had hurt investor
sentiment. With the BP deal, RIL has gone ahead and taken measures to
boost future E&P activity by partnering with a more technologically
competent and experienced E&P player. We believe investors will now
overlook the near-term production shortfall in KG-D6 and focus on the
potential upside from the E&P business in partnership with BP.
E&P concerns make way for refining & petchem upside
With E&P concerns taking a back seat, at least for the near term, RIL’s
strength in refining and petchem should finally come to light and assist in
providing further upside from current levels. RIL stock has been one of
the few Asian stocks that has not outperformed, on back of strength seen
in the refining and petchem margins since the start of 2HFY11.
Upgrade to BUY, use of cash remains a concern
We are upgrading the shares of RIL from a HOLD to a BUY with
unchanged SoTP-based TP of INR1,077. While we do expect the shares
to rally in the near term we would not be buyers beyond the INR1,050
mark as then we would wait to get some incremental news flow on E&P
developments that are more operational in nature. Our only concern from
the deal relates to the increasing cash pile at RIL and the company’s
plans to deploy the cash. Overall, we are now comfortable about RIL’s
E&P prospects. Risks: downturn in refining, potential delays to E&P
developments.
The risk experts
≠ Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
≠ With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
≠ This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
A look into valuation and assets as part of deal
In Exhibits 1 and 2 we provide a snapshot of 23 blocks covered as part of the deal,
which spans ~270,000 sq km and covers predominantly a deepwater and shallow
offshore profile across Krishna-Godavari (KG), Mahanadi, Cauvery, Palar, KeralaKonkan basins.
Valuation fair based on reported reserves; Optionality limited
We think the upfront payment of USD7.2b for a 30% stake in the 23 blocks operated by
RIL is a fair value and not a substantial premium. We show in Exhibit 3 that, based on
announced 2P and in-place reserve estimates for KG-D6 oil/gas/satellite fields,
Mahanadi NEC and KG-D3/D9, USD7.2b is a slight discount to our fair value estimate.
The additional USD1.8b payment could be an implied valuation for further discoveries in
the above blocks and could possibly include discovered but not appraised blocks like
Cauvery offshore and also undrilled prospects like Mahandai-D4 blocks. Based on our
estimates, we believe KG D3, D9 and MN-D4, which were considered to be highly
prospective blocks, have been ascribed low valuations primarily due to lack of success
in D9 and concerns surrounding production potential of KG D6.
Exhibit 3: Deal economics – Fairly valued deal, optionality given very little value
VALUATION AT 100% INTEREST (USD b) Comments
KG-D6 gas 13.54 è Valuing 18.8tcf, at implied EV/boe of USD4
KG-D6 oil 3.84 è Valuing 121m bbls at peak production 35000 bpd
KG-D6 Upside 1.98 è Valuing 4.45tcf at USD5/boe, and 50% recovery
NEC-25 1.61 è Valuing 3.7tcf at USD5/boe, and 50% recovery
Total 20.97
OTHER PROSPECTIVE BLOCKS
D3 * 1.70 è Valuing 3.9tcf at USD5/boe, and 50% recovery
D9 * 2.34 è Valuing 5.2tcf at USD5/boe, and 50% recovery
Sub-total 4.04
GROSS TOTAL 25.01
Implied value of 30% stake 7.50
BP's upfront payment 7.20
Discount (%) 4% è Deal valuation not a huge premium based on our estimates
+ Additional payment 1.80 è To be paid on further exploration success in the blocks acquired
* As reported by Hardy's independent audit estimates
Source: BNP Paribas estimates
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