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The deal with BP values Reliance’s 23 key E&P assets in India at Rs368/sh cf. our
estimate of Rs431/sh. There remain several uncertainties – the value of the deal,
payment schedules and the impact on EPS – but it nonetheless sets a medium term
benchmark for Reliance’s E&P value. This should allow focus to shift from this
under-performing segment towards refining and petrochem where robust margins
may stem and reverse Reliance’s earnings downgrade cycle. Upgrade to BUY.
Reliance sells stake in E&P assets to BP. Reliance and BP have announced that BP
is taking a 30% stake in 23 of Reliance’s upstream assets in India – this includes the
KG-D6 block and most of the exploration assets but excludes the PMT and CBM blocks.
BP will pay $7.2bn upfront, staggered in FY12, and another $1.8bn contingent on
commercial exploration success. In addition, Reliance and BP will also form a 50/50
joint venture to create downstream infrastructure in India over a period of time.
What is not known? We are unclear about the schedule of payments for the upfront
$7.2bn but we understand that it will flow in stages in FY12 itself while the $1.8bn
optional upside may accrue over the subsequent few years. We also await
management guidance on recognition of gains on the disposal and attendant taxation.
Reliance’s E&P assets at Rs368/sh. At $7.2-9bn for 30%, BP has valued these
assets at US$24-30bn. Adjusting for time value and probability of exploration success,
we impute implied risked NPV at $25.6bn (Rs349/sh). Adding the value of the India
blocks that do not form part of the deal will take this to Rs368/sh (cf. Rs431/sh CLSA).
Neutral to positive for EPS. Reliance’s E&P Ebit will also fall by a third or Rs17-18bn
in FY12-13 as its stake in KG-D6 gets cut to 60% from 90% now but will more than
offset by higher other income on the US$7.2bn cash inflow (Rs10-20bn). In fact, if
Reliance is allowed to offset proceeds from the transaction from its capitalised E&P
asset base, E&P DD&A may also fall from ~$12.5/boe now to ~$9.5/boe implying that
Ebit will fall just Rs6-8bn leading to an Rs0.5-3.5/share upgrade to FY12-13 EPS.
A benchmark for E&P valuations. While we await further clarity on the deal, on
earnings and on use of cash (gross cash will rise to $14bn, net debt will fall to just
$1bn), we note that the transaction does set a reasonable indicative base-case
benchmark for Reliance’ E&P valuation – albeit Rs60-65/sh less than our own estimate.
Focus to shift to refining, petchem. Such a benchmark should allow focus to shift
away from E&P that has been plagued by poor production and lacklustre exploration
newsflow towards refining and petchem. Our spot margin EPS indicator for example,
shows ~Rs90/sh+ as FY12 earnings at this time. While this should moderate, cyclically
and seasonally, this underscores that robust margins may stem and reverse the EPS
downgrade cycle that has led to three years of underperformance. Upgrade to BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The deal with BP values Reliance’s 23 key E&P assets in India at Rs368/sh cf. our
estimate of Rs431/sh. There remain several uncertainties – the value of the deal,
payment schedules and the impact on EPS – but it nonetheless sets a medium term
benchmark for Reliance’s E&P value. This should allow focus to shift from this
under-performing segment towards refining and petrochem where robust margins
may stem and reverse Reliance’s earnings downgrade cycle. Upgrade to BUY.
Reliance sells stake in E&P assets to BP. Reliance and BP have announced that BP
is taking a 30% stake in 23 of Reliance’s upstream assets in India – this includes the
KG-D6 block and most of the exploration assets but excludes the PMT and CBM blocks.
BP will pay $7.2bn upfront, staggered in FY12, and another $1.8bn contingent on
commercial exploration success. In addition, Reliance and BP will also form a 50/50
joint venture to create downstream infrastructure in India over a period of time.
What is not known? We are unclear about the schedule of payments for the upfront
$7.2bn but we understand that it will flow in stages in FY12 itself while the $1.8bn
optional upside may accrue over the subsequent few years. We also await
management guidance on recognition of gains on the disposal and attendant taxation.
Reliance’s E&P assets at Rs368/sh. At $7.2-9bn for 30%, BP has valued these
assets at US$24-30bn. Adjusting for time value and probability of exploration success,
we impute implied risked NPV at $25.6bn (Rs349/sh). Adding the value of the India
blocks that do not form part of the deal will take this to Rs368/sh (cf. Rs431/sh CLSA).
Neutral to positive for EPS. Reliance’s E&P Ebit will also fall by a third or Rs17-18bn
in FY12-13 as its stake in KG-D6 gets cut to 60% from 90% now but will more than
offset by higher other income on the US$7.2bn cash inflow (Rs10-20bn). In fact, if
Reliance is allowed to offset proceeds from the transaction from its capitalised E&P
asset base, E&P DD&A may also fall from ~$12.5/boe now to ~$9.5/boe implying that
Ebit will fall just Rs6-8bn leading to an Rs0.5-3.5/share upgrade to FY12-13 EPS.
A benchmark for E&P valuations. While we await further clarity on the deal, on
earnings and on use of cash (gross cash will rise to $14bn, net debt will fall to just
$1bn), we note that the transaction does set a reasonable indicative base-case
benchmark for Reliance’ E&P valuation – albeit Rs60-65/sh less than our own estimate.
Focus to shift to refining, petchem. Such a benchmark should allow focus to shift
away from E&P that has been plagued by poor production and lacklustre exploration
newsflow towards refining and petchem. Our spot margin EPS indicator for example,
shows ~Rs90/sh+ as FY12 earnings at this time. While this should moderate, cyclically
and seasonally, this underscores that robust margins may stem and reverse the EPS
downgrade cycle that has led to three years of underperformance. Upgrade to BUY.
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