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Reliance Industries Ltd.
RIL may bid for US refiner
Valero
„Possible RIL bid for largest independent US refiner Valero?
According to press speculation, RIL may bid for US refiner Valero (see Valero
Energy Corp., 27 October 2011). Valero is the largest independent US refiner with
2.8m b/d of refining capacity (Nelson complexity of 11.3). Valero can process
heavier/sourer, cheaper crudes, which means lower earnings volatility vis-à-vis
peers. A bid for Valero at US$48/share (as per some press reports) appears
aggressive but would be earnings accretive if Valero’s profit is over US$2.2bn in our
opinion. At BofAML’s estimate of US$3.1bn, a Valero acquisition would boost FY13
earnings by 8-19%. Retain Buy.
Acquisition EPS accretive if Valero profit over US$2.2bn
RIL’s net debt is US$3.5bn (gross cash US$15.6bn) and is set to turn net cash
assuming no big acquisition by end of FY12. RIL has been looking for acquisitions
and had even bid for LyondellBasell in 2009. We believe RIL could bid for Valero.
Some reports suggest RIL’s bid may be at US$48/share (82% higher than Oct 27
closing of US$26.2) while BofAML PO for Valero is US$36. Acquiring a 100%
stake in Valero at US$48/share would cost US$27.5bn (net debt US$4,6bn).
Valero’s acquisition would be earnings accretive if Valero's FY13 net profit is
higher than US$2.2bn. BofAML net profit for 2012 is US$3.1bn and consensus is
US$2.5bn. At US$48/share its 2011-12 PE is 9.0-9.6x and EV/EBITDA 4.7-5.4x.
US and Valero’s refining outlook the key
Paying US$48/share for Valero would mean 65% higher valuation per complex
barrel vis-à-vis RIL’s new refinery built in 2009. We believe some premium is
justified if Valero’s stronger GRM in 2Q 2011 (US$11.6/bbl vis-à-vis RIL’s
US$10.3/bbl) is sustainable. 17% of Valero’s throughput in US mid-continent gains
from weak WTI prices but a key question is how long are these gains sustainable?
RIL may bid for US refiner Valero
Valero acquisition earnings accretive?
Would share in Valero profit exceed lower other income/higher interest?
Press reports suggest RIL may bid for US refiner Valero. Some press reports
suggest RIL may pay US$48/share for Valero. Neither company has publicly
commented on the speculation. This would mean US$14bn for 51% or
US$27.5bn for 100% stake in Valero. Acquiring Valero would thus mean lower
other income and higher interest cost for RIL. Whether a Valero acquisition would
be earnings accretive or not would depend on whether RIL’s share of profit in
Valero exceeds hit to profit from lower other income and higher interest cost
Earning accretive in FY13 if Valero profit over US$2.2bn
Our calculations suggest Valero acquisition would be earnings accretive in FY13
if Valero’s FY13 (2012) profit is higher than US$2.2bn.
Table 1: Valero's FY13 profit over which acquisition is earnings accretive for RIL
US$bn Stake acquired in Valero by RIL
51% 100%
Lower other income/higher interest cost (pre-tax) due to acquisition 1.4 2.5
Lower other income/higher interest cost (post-tax) due to acquisition 1.1 2.0
Valero's FY13 profit over which acquisition is earnings accretive for RIL 2.2 2.0
Assumptions
Exchange rate 45.5 45.5
Source: BofA Merrill Lynch Global Research
BofAML’s 2012 Valero profit estimate at US$3.1bn
Consensus 2012 profit estimate US$2.5bn
Table 2: Valero's 2012 net income forecast US$3.1bn as per BofAML
US$ mn 2011E 2012E 2013E
Valero's net income as per
BofAML 2,857 3,070 3,225
Consensus 2,528 2,461 1,980
Source: Bloomberg, BofA Merrill Lynch Global Research
Potential Valero acquisition could boost RIL’s FY13 profit by
8-19%
At BofAML estimate of US$3.1bn, we estimate Valero acquisition would boost
FY13 earnings by 8-19%.
Table 3: Impact of acquisition on RIL's FY13 earnings
US$bn Stake acquired in Valero by RIL
51% 100%
RIL's FY13 profit estimate 5.6 5.6
Less: Hit to net profit from lower other income/higher interest cost (post-tax) due to acquisition 1.1 2.0
Add: share of Valero's FY13 profit of US$3.07bn 1.6 3.1
RIL's FY13 profit if it acquires Valero 6.0 6.6
Upside to FY13 profit from Valero acquisition 8% 19%
Assumptions
RIL's decline in interest income/rise in interest cost (US$bn) 1.4 2.5
Exchange rate 45.5 45.5
Source: BofA Merrill Lynch Global Research
Valero’s GRM and net profit trend
Valero’s GRM lower than RIL in 2007-2010
Valero’s GRM higher than RIL in 2003-06
Valero’s GRM was higher than that of RIL in 2003-2006 but has been lower than
that of RIL in 2007-2010.
Valero’s GRM higher than RIL in 2Q 2011
Likely to be higher even in 3Q; gained from weak WTI in mid-continent
Valero’s GRM in 1H 2011 at US$9.2/bbl is lower than RIL’s US$9.8/bbl. However,
in 2Q 2011 Valero’s GRM at US$11.4/bbl is higher than RIL’s US$10.3/bbl.
Valero gained from its refineries in mid-continent (17% of throughput) achieving
GRM of US$16.5/bbl due to weak WTI prices. We expect Valero’s 3Q 2011 GRM
to be higher than its 2Q GRM and therefore higher than RIL’s 3Q 2011 GRM of
US$10.1/bbl. This is because US 3-2-1 cracks based on WTI are higher in 3Q
2011 at US$31/bbl vis-à-vis US$23.4/bbl in 2Q.
Valero implementing projects to boost EBITDA by 20%
Projects to be commissioned in 4Q 2011 to 4Q 2012
Valero is implementing projects such as FCC revamp, hydrocrackers, hydrogen
plants and product pipeline. These projects, which will be commissioned between
4Q 2011 to 4Q 2012, would boost its EBITDA by 20% (see Table 12 on page 18
in Refiners, 12 July 2011)
Valero’s valuation
PE 9.0-9.6x 2011-12 EPS at price of US$48/share
EV/EBITDA at acquisition price 4.7-5.4x
At an acquisition price of US$48/share, Valero is trading at 9.0-9.6x on BofAML
EPS estimate of US$5 in 2011 and US$5.35 in 2012. At this acquisition price,
Valero’s EV would work out to US$32bn and its EV/EBITDA 4.7-5.4x on 2011
EBITDA of US$5.9bn and 2012 EBITDA of US$6.8bn.
Table 4: At US$48/share, Valero would be valued at 9.0-9.6x 2011-12 EPS
2011 2012
At US$48/share, Valero's
P/E 9.6 9.0
EV/EBITDA 5.4 4.7
Source: BofA Merrill Lynch Global Research
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs950 (GDR US$40.14) is a sum-of-the-parts valuation. It includes EV
of RIL's 3 businesses of Rs945/share and net cash of Rs4/share. The EV of the
refining, petrochemical and E&P business is calculated on a DCF basis, using a
WACC of 11.8pct. Refining and marketing (Rs433) is 46pct of the EV, E&P
valuation (Rs195) 21pct, and petrochemicals (Rs317) 34pct. Downside risks are
(1) Refining and petrochemical margins being lower than expected due to global
economic slowdown (2) 7-year income tax holiday being disallowed on gas
production, which would mean lower cash flow, profit and fair value, (3) Lowerthan-expected oil price, and (4) Large acquisitions that are value dilutive. Upside
risks are (1) Refining and petrochemical margins being better than expected,
(2) Higher-than-expected oil price, (3) Significant reserve accretion in the next 12
months and (4) Large acquisitions that increase fair value significantly.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd.
RIL may bid for US refiner
Valero
„Possible RIL bid for largest independent US refiner Valero?
According to press speculation, RIL may bid for US refiner Valero (see Valero
Energy Corp., 27 October 2011). Valero is the largest independent US refiner with
2.8m b/d of refining capacity (Nelson complexity of 11.3). Valero can process
heavier/sourer, cheaper crudes, which means lower earnings volatility vis-à-vis
peers. A bid for Valero at US$48/share (as per some press reports) appears
aggressive but would be earnings accretive if Valero’s profit is over US$2.2bn in our
opinion. At BofAML’s estimate of US$3.1bn, a Valero acquisition would boost FY13
earnings by 8-19%. Retain Buy.
Acquisition EPS accretive if Valero profit over US$2.2bn
RIL’s net debt is US$3.5bn (gross cash US$15.6bn) and is set to turn net cash
assuming no big acquisition by end of FY12. RIL has been looking for acquisitions
and had even bid for LyondellBasell in 2009. We believe RIL could bid for Valero.
Some reports suggest RIL’s bid may be at US$48/share (82% higher than Oct 27
closing of US$26.2) while BofAML PO for Valero is US$36. Acquiring a 100%
stake in Valero at US$48/share would cost US$27.5bn (net debt US$4,6bn).
Valero’s acquisition would be earnings accretive if Valero's FY13 net profit is
higher than US$2.2bn. BofAML net profit for 2012 is US$3.1bn and consensus is
US$2.5bn. At US$48/share its 2011-12 PE is 9.0-9.6x and EV/EBITDA 4.7-5.4x.
US and Valero’s refining outlook the key
Paying US$48/share for Valero would mean 65% higher valuation per complex
barrel vis-à-vis RIL’s new refinery built in 2009. We believe some premium is
justified if Valero’s stronger GRM in 2Q 2011 (US$11.6/bbl vis-à-vis RIL’s
US$10.3/bbl) is sustainable. 17% of Valero’s throughput in US mid-continent gains
from weak WTI prices but a key question is how long are these gains sustainable?
RIL may bid for US refiner Valero
Valero acquisition earnings accretive?
Would share in Valero profit exceed lower other income/higher interest?
Press reports suggest RIL may bid for US refiner Valero. Some press reports
suggest RIL may pay US$48/share for Valero. Neither company has publicly
commented on the speculation. This would mean US$14bn for 51% or
US$27.5bn for 100% stake in Valero. Acquiring Valero would thus mean lower
other income and higher interest cost for RIL. Whether a Valero acquisition would
be earnings accretive or not would depend on whether RIL’s share of profit in
Valero exceeds hit to profit from lower other income and higher interest cost
Earning accretive in FY13 if Valero profit over US$2.2bn
Our calculations suggest Valero acquisition would be earnings accretive in FY13
if Valero’s FY13 (2012) profit is higher than US$2.2bn.
Table 1: Valero's FY13 profit over which acquisition is earnings accretive for RIL
US$bn Stake acquired in Valero by RIL
51% 100%
Lower other income/higher interest cost (pre-tax) due to acquisition 1.4 2.5
Lower other income/higher interest cost (post-tax) due to acquisition 1.1 2.0
Valero's FY13 profit over which acquisition is earnings accretive for RIL 2.2 2.0
Assumptions
Exchange rate 45.5 45.5
Source: BofA Merrill Lynch Global Research
BofAML’s 2012 Valero profit estimate at US$3.1bn
Consensus 2012 profit estimate US$2.5bn
Table 2: Valero's 2012 net income forecast US$3.1bn as per BofAML
US$ mn 2011E 2012E 2013E
Valero's net income as per
BofAML 2,857 3,070 3,225
Consensus 2,528 2,461 1,980
Source: Bloomberg, BofA Merrill Lynch Global Research
Potential Valero acquisition could boost RIL’s FY13 profit by
8-19%
At BofAML estimate of US$3.1bn, we estimate Valero acquisition would boost
FY13 earnings by 8-19%.
Table 3: Impact of acquisition on RIL's FY13 earnings
US$bn Stake acquired in Valero by RIL
51% 100%
RIL's FY13 profit estimate 5.6 5.6
Less: Hit to net profit from lower other income/higher interest cost (post-tax) due to acquisition 1.1 2.0
Add: share of Valero's FY13 profit of US$3.07bn 1.6 3.1
RIL's FY13 profit if it acquires Valero 6.0 6.6
Upside to FY13 profit from Valero acquisition 8% 19%
Assumptions
RIL's decline in interest income/rise in interest cost (US$bn) 1.4 2.5
Exchange rate 45.5 45.5
Source: BofA Merrill Lynch Global Research
Valero’s GRM and net profit trend
Valero’s GRM lower than RIL in 2007-2010
Valero’s GRM higher than RIL in 2003-06
Valero’s GRM was higher than that of RIL in 2003-2006 but has been lower than
that of RIL in 2007-2010.
Valero’s GRM higher than RIL in 2Q 2011
Likely to be higher even in 3Q; gained from weak WTI in mid-continent
Valero’s GRM in 1H 2011 at US$9.2/bbl is lower than RIL’s US$9.8/bbl. However,
in 2Q 2011 Valero’s GRM at US$11.4/bbl is higher than RIL’s US$10.3/bbl.
Valero gained from its refineries in mid-continent (17% of throughput) achieving
GRM of US$16.5/bbl due to weak WTI prices. We expect Valero’s 3Q 2011 GRM
to be higher than its 2Q GRM and therefore higher than RIL’s 3Q 2011 GRM of
US$10.1/bbl. This is because US 3-2-1 cracks based on WTI are higher in 3Q
2011 at US$31/bbl vis-à-vis US$23.4/bbl in 2Q.
Valero implementing projects to boost EBITDA by 20%
Projects to be commissioned in 4Q 2011 to 4Q 2012
Valero is implementing projects such as FCC revamp, hydrocrackers, hydrogen
plants and product pipeline. These projects, which will be commissioned between
4Q 2011 to 4Q 2012, would boost its EBITDA by 20% (see Table 12 on page 18
in Refiners, 12 July 2011)
Valero’s valuation
PE 9.0-9.6x 2011-12 EPS at price of US$48/share
EV/EBITDA at acquisition price 4.7-5.4x
At an acquisition price of US$48/share, Valero is trading at 9.0-9.6x on BofAML
EPS estimate of US$5 in 2011 and US$5.35 in 2012. At this acquisition price,
Valero’s EV would work out to US$32bn and its EV/EBITDA 4.7-5.4x on 2011
EBITDA of US$5.9bn and 2012 EBITDA of US$6.8bn.
Table 4: At US$48/share, Valero would be valued at 9.0-9.6x 2011-12 EPS
2011 2012
At US$48/share, Valero's
P/E 9.6 9.0
EV/EBITDA 5.4 4.7
Source: BofA Merrill Lynch Global Research
Price objective basis & risk
Reliance Inds (XRELF / RLNIY)
Our PO of Rs950 (GDR US$40.14) is a sum-of-the-parts valuation. It includes EV
of RIL's 3 businesses of Rs945/share and net cash of Rs4/share. The EV of the
refining, petrochemical and E&P business is calculated on a DCF basis, using a
WACC of 11.8pct. Refining and marketing (Rs433) is 46pct of the EV, E&P
valuation (Rs195) 21pct, and petrochemicals (Rs317) 34pct. Downside risks are
(1) Refining and petrochemical margins being lower than expected due to global
economic slowdown (2) 7-year income tax holiday being disallowed on gas
production, which would mean lower cash flow, profit and fair value, (3) Lowerthan-expected oil price, and (4) Large acquisitions that are value dilutive. Upside
risks are (1) Refining and petrochemical margins being better than expected,
(2) Higher-than-expected oil price, (3) Significant reserve accretion in the next 12
months and (4) Large acquisitions that increase fair value significantly.
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