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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Increasing visibility of the US as an LNG exporter to
Asia presents RIL with a strategic opportunity to
capitalise on the emerging value chain.
Wide differential between HH and Asian LNG prices
positive for valuation of shale assets. HH prices of
US$5.5-6.0 will lead to RIL’s shale gas valuation at
Rs69-80/sh; base case in SOTP at Rs45 at US$4.5
RIL’s stock price factoring in value destruction on
current as well as potential cash deployments + trough
GRMs + reserve downgrades in D6 with no exploration
premium. Maintain Outperform.
Global LNG trade on an upswing. Soaring LNG demand
from Asian countries is expected to increase LNG imports to
288bcm in 2015 vs. 231bcm in 2011. With Asian imports
indexed to crude oil, LNG prices are expected to range
between US$10 and US14/mmbtu for imports from Australia
and Qatar.
US LNG will be competitive. Even at Henry Hub (HH)
price of US$5.5-6.0/mmbtu, US LNG exports will be
competitive vs. Australian exports (US$12-14/mmbtu). Well
developed pipeline network in US supported by upcoming
liquefaction LNG terminals will offer opportunities to export
shale gas. We expect US LNG exports of 21bcm to the
Pacific basin by 2015/16 and 32bcm by 2017/18.
Given RIL’s shale gas assets in the US and the wide
differential between HH ($4) and crude-indexed LNG prices
in Asia, acquisition of LNG liquefaction/export terminals
could be a good strategic fit for RIL.
Positive for RIL’s shale gas valuations as well. In the
medium-to-long term, increasing LNG exports from the US
could lead to higher HH prices. Our base case valuation of
RIL’s shale gas assets at Rs45/sh (US$3.0bn) based on
gas price of US$4.5/mmbtu moves up to Rs69-80 at
US$5.5-6.0. Gains are likely to be back-ended though given
the current gas glut in the US and long gestation of the
proposed liquefaction facilities.
Acute re-investment risk to the fore. Current valuations
implying “value destruction” from current as well as potential
cash deployments. The stock is trading below the SOTP of
Rs811 based on (1) stressed GRM of US$7.5 (median
during 2009-10), (2) bear case D6 value and (3) no
exploration premium. Maintain Outperform.
What can go wrong?
Apart from the environmental issues which might slow down shale development and potentially
dilute the evident economic benefits of US LNG exports, there are other issues which investors
need to be aware of.
1. For US LNG exports to make economic sense, domestic gas price should stay below
HH
2. If the Asian LNG prices are tied to crude oil, then crude oil prices would need to remain high
i.e. US$90-110/bbl, for US exports to remain competitive.
3. Success of US exports to Asia might also force a rethink in terms of the crude indexation
norm for Asian LNG prices.
4. Lastly, unlike oil, shale reserves are well diversified and countries are aggressively moving
to exploit the resource. IEA estimates global unconventional resources at 921tcm, five times
more than proven conventional reserves. With major exploration activity underway across
geographies, any major discovery in India, China, etc, will depress the prices in the Pacific
basin.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Increasing visibility of the US as an LNG exporter to
Asia presents RIL with a strategic opportunity to
capitalise on the emerging value chain.
Wide differential between HH and Asian LNG prices
positive for valuation of shale assets. HH prices of
US$5.5-6.0 will lead to RIL’s shale gas valuation at
Rs69-80/sh; base case in SOTP at Rs45 at US$4.5
RIL’s stock price factoring in value destruction on
current as well as potential cash deployments + trough
GRMs + reserve downgrades in D6 with no exploration
premium. Maintain Outperform.
Global LNG trade on an upswing. Soaring LNG demand
from Asian countries is expected to increase LNG imports to
288bcm in 2015 vs. 231bcm in 2011. With Asian imports
indexed to crude oil, LNG prices are expected to range
between US$10 and US14/mmbtu for imports from Australia
and Qatar.
US LNG will be competitive. Even at Henry Hub (HH)
price of US$5.5-6.0/mmbtu, US LNG exports will be
competitive vs. Australian exports (US$12-14/mmbtu). Well
developed pipeline network in US supported by upcoming
liquefaction LNG terminals will offer opportunities to export
shale gas. We expect US LNG exports of 21bcm to the
Pacific basin by 2015/16 and 32bcm by 2017/18.
Given RIL’s shale gas assets in the US and the wide
differential between HH ($4) and crude-indexed LNG prices
in Asia, acquisition of LNG liquefaction/export terminals
could be a good strategic fit for RIL.
Positive for RIL’s shale gas valuations as well. In the
medium-to-long term, increasing LNG exports from the US
could lead to higher HH prices. Our base case valuation of
RIL’s shale gas assets at Rs45/sh (US$3.0bn) based on
gas price of US$4.5/mmbtu moves up to Rs69-80 at
US$5.5-6.0. Gains are likely to be back-ended though given
the current gas glut in the US and long gestation of the
proposed liquefaction facilities.
Acute re-investment risk to the fore. Current valuations
implying “value destruction” from current as well as potential
cash deployments. The stock is trading below the SOTP of
Rs811 based on (1) stressed GRM of US$7.5 (median
during 2009-10), (2) bear case D6 value and (3) no
exploration premium. Maintain Outperform.
What can go wrong?
Apart from the environmental issues which might slow down shale development and potentially
dilute the evident economic benefits of US LNG exports, there are other issues which investors
need to be aware of.
1. For US LNG exports to make economic sense, domestic gas price should stay below
HH
2. If the Asian LNG prices are tied to crude oil, then crude oil prices would need to remain high
i.e. US$90-110/bbl, for US exports to remain competitive.
3. Success of US exports to Asia might also force a rethink in terms of the crude indexation
norm for Asian LNG prices.
4. Lastly, unlike oil, shale reserves are well diversified and countries are aggressively moving
to exploit the resource. IEA estimates global unconventional resources at 921tcm, five times
more than proven conventional reserves. With major exploration activity underway across
geographies, any major discovery in India, China, etc, will depress the prices in the Pacific
basin.
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