BP has valued Reliance Industries' (RIL) new exploration and production (E&P) business at around $25 billion (Rs 1,12,500 crore), according to Goldman Sachs. Goldman Sachs sector analysts said in their report on the BP-RIL deal said they valued the same assets at $29 bn (Rs 1,30,500 crore), including potential upside from the further capex that BP-RIL have committed.
According to analysts, RIL's proposed 30 per cent stake sale to BP in 23 of its exploration and production blocks in India at $7.2 bn would not only impact mid-stream gas dynamics but also open opportunities for RIL to start LNG imports into India.
Industry players, including RIL's partners in a few of the blocks where BP has picked up stake, said this deal will help RIL hedge its E&P risks and expedite its exploration business.
"Even after doing seismic study and data interpretation of some of the blocks, the company has not shown any aggressiveness in the E&P business. It has not been performing beyond its KG-D6 (Krishna-Godavari basin) asset. With BP as partner, it will not only be able to expite the process but also manage cost," said the senior executive of a company dealing with RIL.
According to a JM Financial report, for the Indian gas sector this could imply higher recovery rates and improved technology.
"The deal reinforces our valuation of RIL's E&P business. BP, with its expertise in deep water exploration, can help RIL realise full potential of the blocks. It would strengthen RIL's balance sheet and help focus on other capital-intensive projects. It would potentially transform RIL's E&P technical skill sets, opening future global opportunities."
Edelweiss said the collaboration would lead to accelerated natural gas production, higher discoveries and increase in gas recovery rates.
"With the cash coming in by March 2012, we believe the future driver of RIL will be its ability to find high IRR investment opportunities," said its report.
RBS' report said the BP deal should be able to handle the technical challenge, but the commercial one remains.
"New deepwater gas discoveries will be expensive to develop, relative to the D1/D3 field reserves within KG-D6 which are already producing. Hence, new discoveries would need a higher gas price than is currently being charged for the D6 gas ($4.2 per million British thermal unit. Our existing model assumes the gas price rises to $5.5/mBtu after 2014. But for new discoveries to be developed, the government needs to provide clarity on future pricing. The D1/D3 fields were developed with pricing being decided just a year ahead of production. However, we now believe new developments are unlikely to start unless the pricing issue is settled further in advance," RBS observed.
Citi's report said the JV could give RIL (and India) access to BP's gas resources globally, potentially benefiting RIL's future planned investments (such as the gas cracker), as well as the entire gas value chain in India (companies such as GAIL, GSPL, IGL).
According to Merrill Lynch, the deal would help reaffirm faith in RIL's E&P business, which once was the jewel in its crown. "The deal should thus help re-rate RIL's E&P. It is good news for Indian E&P," the report added.
