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● GAIL on Thursday announced the purchase of a 20% interest in
20,200 acres of Carrizo’s Eagle Ford shale assets for US$95 mn
(US$64 mn upfront; US$31 mn carries). GAIL estimates to invest
of US$300 mn over the next five years, with another 139 wells to
drilled.
● Headline valuation of US$23,515/acre is higher than average, and
13% more than the most recent transaction. While this should be
adjusted for the value of the current output (from eight wells), the
adjustment is likely to be small given development is still in early
stages (and if the wells have been producing for some time).
● A US$95 mn investment (or even US$300 mn) is relatively small
for GAIL. Any positive NPV on the transaction is unlikely to move
the needle on valuations, we think. Expensing of drilling carries
and depreciation charges imply P&L losses can be significant, and
can affect consolidated EPS estimates in the near term.
● GAIL trades at c.2x forward book (5Y average), having de-rated
from 3x recently. While our forecasts suggest RoE can contract to
c.17% (from 20% in FY11), GAIL should have limited downside
and may do well in a weak market. Maintain OUTPERFORM.
GAIL buys shale
GAIL has announced the purchase of a 20% interest in 20,200 acres
of Carrizo’s (CRZO US) Eagle Ford shale assets for US$95 mn
(US$64 mn up front and US$31 mn in drilling carries). This includes
interests in eighit wells that are currently producing 1,700 bopd (gross)
and 3,800 mcfd (gross). 1P reserves are 13.8 mmboe (gross); the JV
plans to drill another 139 wells in the acreage over time. GAIL expects
a total investment of $300mn over the next five years. CRZO will
continue to be the operator, while GAIL hopes to learn shale
technologies for a potential use in India.
On headline, GAIL’s purchase is US$23,515/acre, which appears
higher than the average for Eagle Ford transactions (US$12,000/acre).
This should ideally be adjusted for the value of the current production
(we understand comps are at US$70,000 per flowing boe), but this
acreage is relatively early stage (with only eight wells of the planned
151). The eight wells may not be worth much (especially if they have
been producing for some time). GAIL seems to have then paid well
above average for each Eagle Ford acre.
● A US$95 mn investment (or even total US$300 mn) is relatively
small for GAIL. Any positive NPV on the transaction is unlikely to
move the needle on valuations, we think.
● On back-of-envelope calculations, income from current production
should cover interest costs. GAIL will, however, have to fund nearterm
capex. Depreciation charges (and the expensing of the
drilling carry) can lead to relatively large P&L losses (especially
over the next few quarters), which may reduce GAIL’s consol.
EPS.
● We do not see any ‘fit’ between GAIL’s operations and the US
shale business. GAIL may ‘learn’ shale technology for use in
India—but the Indian shale promise is yet un-established. Even if
India has shale resources, the evolution of a regulatory framework
and issues around land acquisition can delay exploitation.
● CRZO’s presentations suggest net EUR of 300 mboe per well,
which, on 143 remaining wells imply recoverable resources of c.43
mmboe. Peak production rates are likely to be higher. Given the
early stage, the asset carries significant execution and cost
inflation risks, we think.
Lower momentum on core businesses?
The disappointment in domestic gas supplies has derailed GAIL’s
pipeline business momentum. While GAIL still has large ongoing
capex in new pipelines and petrochemicals, such an investment in
shale may imply GAIL is forced to look outside core businesses to
spend its annual cash. GAIL may end up being a larger conglomerate,
which can impact valuations in the long term.
GAIL now trades at c.2x forward book—which is an average for the
last five years, having de-rated from 3x recently (valuations have
bottomed at 1.5x). While our forecasts suggest RoE can contract to
c.17% (from 20% in FY11), GAIL should have limited downside and
may do well in a weak market. Maintain OUTPERFORM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● GAIL on Thursday announced the purchase of a 20% interest in
20,200 acres of Carrizo’s Eagle Ford shale assets for US$95 mn
(US$64 mn upfront; US$31 mn carries). GAIL estimates to invest
of US$300 mn over the next five years, with another 139 wells to
drilled.
● Headline valuation of US$23,515/acre is higher than average, and
13% more than the most recent transaction. While this should be
adjusted for the value of the current output (from eight wells), the
adjustment is likely to be small given development is still in early
stages (and if the wells have been producing for some time).
● A US$95 mn investment (or even US$300 mn) is relatively small
for GAIL. Any positive NPV on the transaction is unlikely to move
the needle on valuations, we think. Expensing of drilling carries
and depreciation charges imply P&L losses can be significant, and
can affect consolidated EPS estimates in the near term.
● GAIL trades at c.2x forward book (5Y average), having de-rated
from 3x recently. While our forecasts suggest RoE can contract to
c.17% (from 20% in FY11), GAIL should have limited downside
and may do well in a weak market. Maintain OUTPERFORM.
GAIL buys shale
GAIL has announced the purchase of a 20% interest in 20,200 acres
of Carrizo’s (CRZO US) Eagle Ford shale assets for US$95 mn
(US$64 mn up front and US$31 mn in drilling carries). This includes
interests in eighit wells that are currently producing 1,700 bopd (gross)
and 3,800 mcfd (gross). 1P reserves are 13.8 mmboe (gross); the JV
plans to drill another 139 wells in the acreage over time. GAIL expects
a total investment of $300mn over the next five years. CRZO will
continue to be the operator, while GAIL hopes to learn shale
technologies for a potential use in India.
On headline, GAIL’s purchase is US$23,515/acre, which appears
higher than the average for Eagle Ford transactions (US$12,000/acre).
This should ideally be adjusted for the value of the current production
(we understand comps are at US$70,000 per flowing boe), but this
acreage is relatively early stage (with only eight wells of the planned
151). The eight wells may not be worth much (especially if they have
been producing for some time). GAIL seems to have then paid well
above average for each Eagle Ford acre.
● A US$95 mn investment (or even total US$300 mn) is relatively
small for GAIL. Any positive NPV on the transaction is unlikely to
move the needle on valuations, we think.
● On back-of-envelope calculations, income from current production
should cover interest costs. GAIL will, however, have to fund nearterm
capex. Depreciation charges (and the expensing of the
drilling carry) can lead to relatively large P&L losses (especially
over the next few quarters), which may reduce GAIL’s consol.
EPS.
● We do not see any ‘fit’ between GAIL’s operations and the US
shale business. GAIL may ‘learn’ shale technology for use in
India—but the Indian shale promise is yet un-established. Even if
India has shale resources, the evolution of a regulatory framework
and issues around land acquisition can delay exploitation.
● CRZO’s presentations suggest net EUR of 300 mboe per well,
which, on 143 remaining wells imply recoverable resources of c.43
mmboe. Peak production rates are likely to be higher. Given the
early stage, the asset carries significant execution and cost
inflation risks, we think.
Lower momentum on core businesses?
The disappointment in domestic gas supplies has derailed GAIL’s
pipeline business momentum. While GAIL still has large ongoing
capex in new pipelines and petrochemicals, such an investment in
shale may imply GAIL is forced to look outside core businesses to
spend its annual cash. GAIL may end up being a larger conglomerate,
which can impact valuations in the long term.
GAIL now trades at c.2x forward book—which is an average for the
last five years, having de-rated from 3x recently (valuations have
bottomed at 1.5x). While our forecasts suggest RoE can contract to
c.17% (from 20% in FY11), GAIL should have limited downside and
may do well in a weak market. Maintain OUTPERFORM.
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