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Reliance Industries
Hardy option value isn't relevant
Hardy's decision not to exercise an option to increase its stake in the D3 block
has no implications for the valuation of D3 and on the valuation of RIL's E&P
assets in our view. Also, our gross valuation for known reserves (US$16.6bn) is
higher than the estimate put out by Wood Mackenzie.
! On 21 February 2011, RIL announced that BP would be taking a 30% stake in 23 blocks for
US$7.2bn implying a gross (100%) value of US$24bn for the entire portfolio. Our value of the
blocks where commercial discoveries have been established (only KG-D6 and NEC-25) is
US$16.6bn (100% stake) and the balance consideration paid by BP has been assumed to be
some sort of acquisition premium or exploration upside (yet to be discovered reserves).
! The 23 blocks includes block D3 (KG-DWN-2003/1) for which we have not explicitly assigned
any value (RIL 90% stake, Hardy 10%). 4 gas discoveries have been made to date on this
block and Hardy estimates the best case gross contingent resource estimate for the first 3
discoveries to be 521bcf, a level which does not guarantee commerciality in our view.
! Hardy Oil has announced that following the above RIL-BP transaction, it retained an option to
increase its stake in the D3 block by 3% from RIL, while waiving its pre-emption rights in all
blocks which were part of the deal (D3, AS-ONN-2000/1 and KG-DWN-2001/1 or D9 ). The
option consideration implies a gross value of around US$5bn for the D3 block and Hardy has
elected not to exercise its option.
! We believe it would be misleading to give any weightage to the US$5bn valuation attached to
D3. RIL/BP would have assigned value to each of the blocks under the deal to arrive at the
total deal value and the acquisition premium could be attributed to those blocks which has
external partners with pre-emption rights to buy additional stake (to maximise the value of
stake to be sold under the pre-emption rights).
! Interestingly, a US$5bn valuation for the D3 block implies that Hardy's 10% interest is worth
US$500m. On the other hand, Hardy's current market cap is US$250m.
! Global consultants, Wood Mackenzie (WM) recently released a report on the Reliance-BP
transaction. Key highlights from WM report: 1.) We value a 30% stake in RIL's on stream
fields at US$3.9bn (NPV10) under our base case assumptions. This includes the commercial
reserves in D6 and NEC-25 areas, but not those that have yet to receive approval of the
development plan. 2.) Our model assumes 11.5tcf is currently commercial in D6. A further 2tcf
of reserves, although expected to be commercial, are currently classified as technical
reserves as RIL has yet to submit a development plan for them. We do not expect these
reserves to come on stream before 2018. 3.) An additional 1.5tcf of commercial reserves are
located in NEC-25, with an estimated start-up date of 2015. The development of these
reserves is expected to be costly and are thus highly sensitive to gas prices. 4.) We have
assumed that D6 gas will receive a price equivalent of US$3.83/mcf until 2014. Post 2014,
prices are forecast to gradually increase by an average of 2% pa. 5.) The NEC-25
development area is expected to be more sensitive to gas prices. We are assuming a
US$4.5/mcf gas price in the first year of production in 2015. 6.) Neither NEC-25 nor the D6
gas fields are eligible for a seven-year tax holiday as per current regulation. However, the
seven-year tax holiday applies to the D6 oil production.
! WM's estimate of gross (100% stake) resource potential is 3.1bn boe, same as ours (though
break up is slightly different). The gross value of assets works out to US$13.1bn versus our
estimate of US$16.6bn. We differ on assumptions of production profile and gas prices, but the
likely cause of our higher valuation is probably our assumption of a tax holiday even for gas
production. In either case, the difference between value of known assets and value implied by
transaction value (US$24bn) would have to be bridged by assuming some sort of acquisition
premium or exploration upside (yet to be discovered reserves).
! RIL E&P valuation is currently underpinned by the BP transaction value (thus providing
downside support). However, given the extent of the exploration upside built in the valuation,
positive news flow will be required over next 12 months on D6 production outlook and new
oil/gas discoveries. In the absence of any positive news, the BP valuation benchmark may not
sustain for more than 12 months.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
Hardy option value isn't relevant
Hardy's decision not to exercise an option to increase its stake in the D3 block
has no implications for the valuation of D3 and on the valuation of RIL's E&P
assets in our view. Also, our gross valuation for known reserves (US$16.6bn) is
higher than the estimate put out by Wood Mackenzie.
! On 21 February 2011, RIL announced that BP would be taking a 30% stake in 23 blocks for
US$7.2bn implying a gross (100%) value of US$24bn for the entire portfolio. Our value of the
blocks where commercial discoveries have been established (only KG-D6 and NEC-25) is
US$16.6bn (100% stake) and the balance consideration paid by BP has been assumed to be
some sort of acquisition premium or exploration upside (yet to be discovered reserves).
! The 23 blocks includes block D3 (KG-DWN-2003/1) for which we have not explicitly assigned
any value (RIL 90% stake, Hardy 10%). 4 gas discoveries have been made to date on this
block and Hardy estimates the best case gross contingent resource estimate for the first 3
discoveries to be 521bcf, a level which does not guarantee commerciality in our view.
! Hardy Oil has announced that following the above RIL-BP transaction, it retained an option to
increase its stake in the D3 block by 3% from RIL, while waiving its pre-emption rights in all
blocks which were part of the deal (D3, AS-ONN-2000/1 and KG-DWN-2001/1 or D9 ). The
option consideration implies a gross value of around US$5bn for the D3 block and Hardy has
elected not to exercise its option.
! We believe it would be misleading to give any weightage to the US$5bn valuation attached to
D3. RIL/BP would have assigned value to each of the blocks under the deal to arrive at the
total deal value and the acquisition premium could be attributed to those blocks which has
external partners with pre-emption rights to buy additional stake (to maximise the value of
stake to be sold under the pre-emption rights).
! Interestingly, a US$5bn valuation for the D3 block implies that Hardy's 10% interest is worth
US$500m. On the other hand, Hardy's current market cap is US$250m.
! Global consultants, Wood Mackenzie (WM) recently released a report on the Reliance-BP
transaction. Key highlights from WM report: 1.) We value a 30% stake in RIL's on stream
fields at US$3.9bn (NPV10) under our base case assumptions. This includes the commercial
reserves in D6 and NEC-25 areas, but not those that have yet to receive approval of the
development plan. 2.) Our model assumes 11.5tcf is currently commercial in D6. A further 2tcf
of reserves, although expected to be commercial, are currently classified as technical
reserves as RIL has yet to submit a development plan for them. We do not expect these
reserves to come on stream before 2018. 3.) An additional 1.5tcf of commercial reserves are
located in NEC-25, with an estimated start-up date of 2015. The development of these
reserves is expected to be costly and are thus highly sensitive to gas prices. 4.) We have
assumed that D6 gas will receive a price equivalent of US$3.83/mcf until 2014. Post 2014,
prices are forecast to gradually increase by an average of 2% pa. 5.) The NEC-25
development area is expected to be more sensitive to gas prices. We are assuming a
US$4.5/mcf gas price in the first year of production in 2015. 6.) Neither NEC-25 nor the D6
gas fields are eligible for a seven-year tax holiday as per current regulation. However, the
seven-year tax holiday applies to the D6 oil production.
! WM's estimate of gross (100% stake) resource potential is 3.1bn boe, same as ours (though
break up is slightly different). The gross value of assets works out to US$13.1bn versus our
estimate of US$16.6bn. We differ on assumptions of production profile and gas prices, but the
likely cause of our higher valuation is probably our assumption of a tax holiday even for gas
production. In either case, the difference between value of known assets and value implied by
transaction value (US$24bn) would have to be bridged by assuming some sort of acquisition
premium or exploration upside (yet to be discovered reserves).
! RIL E&P valuation is currently underpinned by the BP transaction value (thus providing
downside support). However, given the extent of the exploration upside built in the valuation,
positive news flow will be required over next 12 months on D6 production outlook and new
oil/gas discoveries. In the absence of any positive news, the BP valuation benchmark may not
sustain for more than 12 months.
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