Reliance Industries Ltd’s (RIL) investors have reason to rejoice after a long time. The company announced on Monday after market hours that BP Plc is buying a 30% stake in RIL’s 23 oil and gas blocks for an aggregate consideration of $7.2billion (Rs32,472 crore), valuing them at $24 billion. RIL expects to receive payments for the stake in FY12. Additionally, BP could also pay $1.8 billion, depending on the exploration success leading to development of commercial discoveries. According to the press statement, the payments and combined investment in the blocks could amount to $20 billion.
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What does this mean for the company? In RIL’s sum-of-total-parts valuation, the Street was assigning around Rs350-400 per share for its exploration and production (E&P) business, and the rest came from the remaining two businesses—petrochemicals and refining. But production from the KG-D6 block was showing no sign of improvement for some time and analysts had assigned considerable value to KG-D6 in the total E&P valuation of RIL. In fact, KG-D6 output had fallen consistently in the last three quarters. In the December quarter, KG-D6 production fell to 54.5 million standard cu. m. per day (mscmd) from 58 mscmd in the September quarter and 60 mscmd in the June quarter. That was a big concern for investors. Analysts point out that their estimate of the worth of the E&P business as a whole is around $25 billion. The fact that BP is giving $24 billion for a part of those assets means that the valuation could be revised upwards.
The deal with BP offers another two reasons for some hope and comfort for the RIL investor. One, they can hope that BP’s technical expertise will help reverse or, at least, stem the decline in production from KG-D6, although the company has said nothing about that. Nevertheless, the deal does bring BP’s technical expertise and experience in the space, and RIL’s project management and operations expertise together. RIL’s stock was up 2% to Rs957 per share on Monday. On the London Stock Exchange, RIL’s GDRs were up 7% to $44.54 on Monday and BP’s shares were up 0.4% to British pence 494.85 at 8.30pm IST.
The other reason for good cheer is that the funds that RIL will get from BP could be used to fast-track its exploration activities in other fields. That could offset the less-than-expected production from the KG-D6 fields, although here, too, the company has been extremely reticent. Nevertheless, the fact remains that most of the negatives from the E&P business have already been priced into the stock and any good news will help.
What’s more, the outlook for the remaining two businesses, too, has improved. Collectively, all this should result in a boost for the RIL stock in the near term.
Graphics by Yogesh Kumar/Mint
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