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RIL ---------------------------------------------------------------------------------Maintain OUTPERFORM
BP helps underscore RIL's E&P valuations
● BP, on 21 Feb, agreed to pay $7.2 bn to RIL for a 30% stake in
most of the latter’s Indian E&P acreage (incl. KG D6, NEC 25, D3,
D9 and the MN D4 blocks); with another $1.8 bn linked to E&P
successes. RIL/BP also now have a JV for sourcing/selling of gas.
● The $7.2 bn is almost exactly in line with our numbers. The $1.8
bn represents upside, but current value should be low. RIL’s tax
obligations on money received are yet unclear. Near-term EPS
estimates can fall; the extent of which will depend on use of cash.
● BP/RIL have discussed this deal for 2 years. BP will have looked
at geological data and production issues at D6. BP’s investment is
then a vote of confidence in the longer term prospects of RIL’s
E&P; that will help provide support to RIL’s E&P valuations. Nearterm volatility in E&P volumes may not matter that much now.
● This shifts focus on RIL’s refining, petchem businesses; both of
which are currently doing well; and valuations for which are easier
to benchmark. This can help RIL get closer to our target price.
Use of cash now becomes a larger medium-term issue. Maintain
OUTPERFORM
BP buys 30% of RIL’s domestic E&P
In a deal announced 21 Feb, BP has agreed to take a 30% stake in
most of RIL’s Indian E&P acreage. These include the producing KG
D6 (oil and gas) block, the discovered NEC 25 reserves, and other
promising acreage on the east coast (D3/D9/MND4) blocks. BP will
pay US$7.2 bn in phases through FY12 (as government approvals
come through), and can pay US$1.8 bn based on commercially
exploitable exploratory successes in future. BP and RIL have also
formed a 50:50 JV for the sourcing and marketing of natural gas in
India. In total, BP expects to invest about US$20 bn in India over
several years. On the call, the companies suggested that both the UK
and the Indian governments had been taken on board (the agreement
is reportedly being signed at 10 Downing Street) before the deal was
announced. While they make time, approvals from the Government of
India should come through.
De-risking E&P valuations
● In our SOTP, we have RIL’s E&P (KG D6 oil and gas, NEC 25 and
exploration upsides) at Rs336/share. BP’s US$7.2 bn payment for
30% is almost exactly in line.
● RIL’s tax obligations on the money received are yet unclear.
● The US$1.8 bn upside payments are likely to happen over an
extended time period; present value (upside to our TP) should be
relatively small. The few blocks that BP has not taken stakes in
are, by implication, unlikely to have much E&P promise.
● BP and RIL have been in discussion for two years: BP would have
looked at geological data in detail, and analysed current output
issues at D6. Our valuations for D6 oil and gas assume 80
mmscmd production by FY14. The fact that BP is 1) willing to take
on current reservoir uncertainties, and 2) pay valuations that imply
higher volumes, will de-risk RIL’s upstream portfolio valuations
(and allow stock to get closer to our target price), we think.
● As the deal closes, RIL EPS numbers should see cuts; the extent
of which will depend on RIL’s use of cash.
● RIL has not specified any use for its now approximately US$15 bn
cash. The drag on returns can make the imperative for inorganic
growth stronger.
● RIL shall now be able to access BP’s technical expertise in deep
water exploration and in fixing D6 gas volumes; and potentially
look at a LNG terminal / business in India.
● BP believes this purchase allows it to partner a strong company,
enter a promising basin and access a growing energy market.
Given the deep water exploratory risks, we presume BP has used
a reasonably high IRR for its valuation of RIL’s E&P assets. BP
has about US$18 bn in cash and a plan to divest US$22 bn in
assets.
Figure 1: RIL SOTP valuation
SOTP Rs/sh SOTP Rs/sh BP valuation
a) Chemicals 237
b) Refining 469
d) KGD6+MA
Oil+NEC25+Exp option
336 331*
c) Others 36 e) CBM+US Shale 54
Total (a+b+c+d+e) 1,132 1,127
*Assuming no value for the $1.8bn potential upside
Source: Company data, Credit Suisse estimates.
We will update our numbers as the deal closes and as we get clarity
on taxation. Near-term oil/gas production volumes will continue to
cause EPS estimate volatility. With this deal however, RIL has
helped ’fix’ valuations for almost all of its E&P business. Near-term
valuation uncertainties now lie with the commodity petchem/refining
businesses; both of which have surprised the market with their recent
strength. Lower refining spare capacity and seasonality towards late
2011 can help refining do better. RIL’s use of its cash is now a bigger
a driver of medium-term valuations, we think. Maintain
OUTPERFORM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RIL ---------------------------------------------------------------------------------Maintain OUTPERFORM
BP helps underscore RIL's E&P valuations
● BP, on 21 Feb, agreed to pay $7.2 bn to RIL for a 30% stake in
most of the latter’s Indian E&P acreage (incl. KG D6, NEC 25, D3,
D9 and the MN D4 blocks); with another $1.8 bn linked to E&P
successes. RIL/BP also now have a JV for sourcing/selling of gas.
● The $7.2 bn is almost exactly in line with our numbers. The $1.8
bn represents upside, but current value should be low. RIL’s tax
obligations on money received are yet unclear. Near-term EPS
estimates can fall; the extent of which will depend on use of cash.
● BP/RIL have discussed this deal for 2 years. BP will have looked
at geological data and production issues at D6. BP’s investment is
then a vote of confidence in the longer term prospects of RIL’s
E&P; that will help provide support to RIL’s E&P valuations. Nearterm volatility in E&P volumes may not matter that much now.
● This shifts focus on RIL’s refining, petchem businesses; both of
which are currently doing well; and valuations for which are easier
to benchmark. This can help RIL get closer to our target price.
Use of cash now becomes a larger medium-term issue. Maintain
OUTPERFORM
BP buys 30% of RIL’s domestic E&P
In a deal announced 21 Feb, BP has agreed to take a 30% stake in
most of RIL’s Indian E&P acreage. These include the producing KG
D6 (oil and gas) block, the discovered NEC 25 reserves, and other
promising acreage on the east coast (D3/D9/MND4) blocks. BP will
pay US$7.2 bn in phases through FY12 (as government approvals
come through), and can pay US$1.8 bn based on commercially
exploitable exploratory successes in future. BP and RIL have also
formed a 50:50 JV for the sourcing and marketing of natural gas in
India. In total, BP expects to invest about US$20 bn in India over
several years. On the call, the companies suggested that both the UK
and the Indian governments had been taken on board (the agreement
is reportedly being signed at 10 Downing Street) before the deal was
announced. While they make time, approvals from the Government of
India should come through.
De-risking E&P valuations
● In our SOTP, we have RIL’s E&P (KG D6 oil and gas, NEC 25 and
exploration upsides) at Rs336/share. BP’s US$7.2 bn payment for
30% is almost exactly in line.
● RIL’s tax obligations on the money received are yet unclear.
● The US$1.8 bn upside payments are likely to happen over an
extended time period; present value (upside to our TP) should be
relatively small. The few blocks that BP has not taken stakes in
are, by implication, unlikely to have much E&P promise.
● BP and RIL have been in discussion for two years: BP would have
looked at geological data in detail, and analysed current output
issues at D6. Our valuations for D6 oil and gas assume 80
mmscmd production by FY14. The fact that BP is 1) willing to take
on current reservoir uncertainties, and 2) pay valuations that imply
higher volumes, will de-risk RIL’s upstream portfolio valuations
(and allow stock to get closer to our target price), we think.
● As the deal closes, RIL EPS numbers should see cuts; the extent
of which will depend on RIL’s use of cash.
● RIL has not specified any use for its now approximately US$15 bn
cash. The drag on returns can make the imperative for inorganic
growth stronger.
● RIL shall now be able to access BP’s technical expertise in deep
water exploration and in fixing D6 gas volumes; and potentially
look at a LNG terminal / business in India.
● BP believes this purchase allows it to partner a strong company,
enter a promising basin and access a growing energy market.
Given the deep water exploratory risks, we presume BP has used
a reasonably high IRR for its valuation of RIL’s E&P assets. BP
has about US$18 bn in cash and a plan to divest US$22 bn in
assets.
Figure 1: RIL SOTP valuation
SOTP Rs/sh SOTP Rs/sh BP valuation
a) Chemicals 237
b) Refining 469
d) KGD6+MA
Oil+NEC25+Exp option
336 331*
c) Others 36 e) CBM+US Shale 54
Total (a+b+c+d+e) 1,132 1,127
*Assuming no value for the $1.8bn potential upside
Source: Company data, Credit Suisse estimates.
We will update our numbers as the deal closes and as we get clarity
on taxation. Near-term oil/gas production volumes will continue to
cause EPS estimate volatility. With this deal however, RIL has
helped ’fix’ valuations for almost all of its E&P business. Near-term
valuation uncertainties now lie with the commodity petchem/refining
businesses; both of which have surprised the market with their recent
strength. Lower refining spare capacity and seasonality towards late
2011 can help refining do better. RIL’s use of its cash is now a bigger
a driver of medium-term valuations, we think. Maintain
OUTPERFORM.
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