Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
E&P business remains in
spot, near-term gains unlikely
Quick Comment: The CAG report on the performance
audit of hydrocarbon PSCs was presented in Parliament
on 8 September, including its observations related to
RIL’s KG D6 block. The report observed several
technical and procedural lapses, contrary to PSC
provisions. It also included the concerns related to
front-loading of capex, which adversely affect the
government’s share of petroleum profit.
RIL on Friday in a media released countered CAG’s
observations through independent reports from
E&Y, IPA Inc., and Daniel Johnston & Co.
1) Ernst &Young concluded that KG-D6 costs are unlikely
to be inflated. Procurement was done through leading
vendors with competitive bidding comparable to
then-prevalent prices. It further commented that increase
in capex is detrimental to both RIL and the government.
2) IPA compared the KG-D6 FDP with 53 other global
projects’ FDP. It confirmed that the project was a
success despite considerable execution challenges and
difficulties in the E&P capital project market.
3) Daniel Johnston & Co. commented that a) RIL’s
exploration, appraisal and development operations are
entirely consistent with good international petroleum
industry practices; b) industry costs rose considerably
between May-2004 and December 2006 when RIL
submitted its revised capex plan. The final costs appear
to be within 10% of RIL’s cost estimates. c)The
petroleum fiscal system in India doesn’t create any
incentive for the contractor to inflate capital spending.
E&P business to continue to face headwinds: KG D6
volumes have been declining in the last few quarters.
Current production is 45-50 mmsmcd. We believe RIL
needs two years before we see any increase in
production; until then volumes are likely to remain flat or
decline marginally. Longer-term, we remain hopeful that
with BP now a key partner in RIL E&P blocks, it should
be able to leverage BP’s expertise, unlocking value by
increasing production and expediting exploration.
Valuation Methodology
Our price target is based on a sum-of-the-parts valuation:
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.5x, which is the average of its global
refining peers. We value the R&M business at Rs320 per
share.
2) The petrochemicals business valuation is based on an
average F2012e EV/EBITDA of 7.2x. We value the
Petrochemical business at Rs270 per share.
3) We use a P/CEPS target multiple-based valuation for
RIL’s E&P business. We assign a target multiple of 6.2x to
our average projected cash profits of US$3.2bn
(F2012-16E) for global comps, a 25% discount to global
E&P companies for F2012e. Based on this, we arrive at a
fair value of US$20bn, or Rs278 per share, for RIL’s E&P
business.
4) We have valued RIL’s investments at 15% discount to the
F2011 book value, which includes RIL’s investment in
telecom business. This equates to a value of Rs74/share
5) We also value RIL’s treasury shares at ~US$4.7bn, or
Rs66/share, a 15% discount to current market price to
factor in market volatility.
6) After deducting F2012e net debt of Rs53/share, we arrive
at SOTP value of Rs956/share.
We see the following key risks to our price target
1) The stock’s historical correlation with the market is 0.85x,
and hence a market correction would affect RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to
a seven-year tax holiday, the Ministry of Petroleum has
suggested that the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$4.7bn.
4) Potential delays in the execution of the company’s
business plan.
5) A significant oil/gas discovery could lead to increases in
reserves and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets
could lead to downward revisions to resource estimates
and hence a negative impact on our price target.
6) A sharp decline in global economic growth that would
likely compress our projected petrochemical and refining
margins.
7) Longer-term, we remain hopeful that with BP now a key
partner in RIL E&P blocks, it should be able to leverage
BP’s expertise, unlocking value by increasing production
and expediting exploration.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries
E&P business remains in
spot, near-term gains unlikely
Quick Comment: The CAG report on the performance
audit of hydrocarbon PSCs was presented in Parliament
on 8 September, including its observations related to
RIL’s KG D6 block. The report observed several
technical and procedural lapses, contrary to PSC
provisions. It also included the concerns related to
front-loading of capex, which adversely affect the
government’s share of petroleum profit.
RIL on Friday in a media released countered CAG’s
observations through independent reports from
E&Y, IPA Inc., and Daniel Johnston & Co.
1) Ernst &Young concluded that KG-D6 costs are unlikely
to be inflated. Procurement was done through leading
vendors with competitive bidding comparable to
then-prevalent prices. It further commented that increase
in capex is detrimental to both RIL and the government.
2) IPA compared the KG-D6 FDP with 53 other global
projects’ FDP. It confirmed that the project was a
success despite considerable execution challenges and
difficulties in the E&P capital project market.
3) Daniel Johnston & Co. commented that a) RIL’s
exploration, appraisal and development operations are
entirely consistent with good international petroleum
industry practices; b) industry costs rose considerably
between May-2004 and December 2006 when RIL
submitted its revised capex plan. The final costs appear
to be within 10% of RIL’s cost estimates. c)The
petroleum fiscal system in India doesn’t create any
incentive for the contractor to inflate capital spending.
E&P business to continue to face headwinds: KG D6
volumes have been declining in the last few quarters.
Current production is 45-50 mmsmcd. We believe RIL
needs two years before we see any increase in
production; until then volumes are likely to remain flat or
decline marginally. Longer-term, we remain hopeful that
with BP now a key partner in RIL E&P blocks, it should
be able to leverage BP’s expertise, unlocking value by
increasing production and expediting exploration.
Valuation Methodology
Our price target is based on a sum-of-the-parts valuation:
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.5x, which is the average of its global
refining peers. We value the R&M business at Rs320 per
share.
2) The petrochemicals business valuation is based on an
average F2012e EV/EBITDA of 7.2x. We value the
Petrochemical business at Rs270 per share.
3) We use a P/CEPS target multiple-based valuation for
RIL’s E&P business. We assign a target multiple of 6.2x to
our average projected cash profits of US$3.2bn
(F2012-16E) for global comps, a 25% discount to global
E&P companies for F2012e. Based on this, we arrive at a
fair value of US$20bn, or Rs278 per share, for RIL’s E&P
business.
4) We have valued RIL’s investments at 15% discount to the
F2011 book value, which includes RIL’s investment in
telecom business. This equates to a value of Rs74/share
5) We also value RIL’s treasury shares at ~US$4.7bn, or
Rs66/share, a 15% discount to current market price to
factor in market volatility.
6) After deducting F2012e net debt of Rs53/share, we arrive
at SOTP value of Rs956/share.
We see the following key risks to our price target
1) The stock’s historical correlation with the market is 0.85x,
and hence a market correction would affect RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to
a seven-year tax holiday, the Ministry of Petroleum has
suggested that the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$4.7bn.
4) Potential delays in the execution of the company’s
business plan.
5) A significant oil/gas discovery could lead to increases in
reserves and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets
could lead to downward revisions to resource estimates
and hence a negative impact on our price target.
6) A sharp decline in global economic growth that would
likely compress our projected petrochemical and refining
margins.
7) Longer-term, we remain hopeful that with BP now a key
partner in RIL E&P blocks, it should be able to leverage
BP’s expertise, unlocking value by increasing production
and expediting exploration.
No comments:
Post a Comment