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