Dalal Street Investments

Reliance Industries – Overseas E&P production portfolio

June 25, 2010

RIL announced its second JV for shale gas assets in the US, with Pioneer Natural Resources and Newpeck LLC in the Eagle Ford shale formation. RIL will acquire ~118k acres from Pioneer and Newpek for a total consideration of US$1.3bn. RIL will pay a total of US$1.3bn, US$263mn in upfront cash and the remaining US$1.05bn in the form of a drilling carry. The deal implies price of US$11,144/ acre, however, considering the drilling carry is spread over four years, adjusting for time value the deal implies a price of US$9,438/acre using a discount rate of 10%, which is lower than the US$10,797/acre paid by RIL to Atlas in its first transaction.

We are positive on RIL’s recent investments in shale gas and its stated strategy of building a sizeable portfolio there. However, NPV accretion notwithstanding, modest deal sizes relative to RIL’s FCF generation (RIL’s share of total capex over the life of the asset is estimated at cUS$5.5-6bn) will limit significant value accretion for investors.

Individually, such investments have small valuation impact, but with time, these will cumulate; uncertainty around earnings from
each will reduce; when the upside can be meaningful.

However, Kotak is still not happy with RIL’s Valuation and said in a report that –

US$22 bn of valuation gap between market value and our fair value of extant assets.

Revised RIL EPS Estimates for FY 11 and FY 12 with price Target
Citi – 68 and 78 with target of 1150
Morgan Stanley – 80 and 89 with target of 1322
Credit Suisse – 68 and 88 with target of 1223
Kotak – 63 and 80 with SELL and a target of Rs 985
Goldman Sachs – 64 and 78 with target of 1160
Edelweiss – Rs 70 and Rs 90


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