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Thursday, February 24, 2011

Reliance Industries & British Petroleum deal

Reliance Industries Ltd. (RIL) and British Petroleum (BP) has announced a partnership deal. Let's see if this new development will help RIL and it's investors or not.

BP will be buying a 30% stake in 23 oil and gas production-sharing contracts that RIL operates in India. This includes oil producing KG-D6 block. Also a 50:50 joint venture (JV) will be formed between the two companies for sourcing-marketing gas in India. This JV will accelerate creation of infrastructure for receiving, transporting and marketing natural gas.

BP will pay RIL US $7.2bn for consideration. Adding up performance payments of up to US $1.8bn based on exploration success in future, combined investment could amount to US $20bn.

This deal is definitely positive for RIL since expertise of both companies may transform into optimization of existing oil producing blocks and enhancement of resources for exploration activities. The transaction amount evaluates RIL stock at Rs.363/share to the east coast blocks against valuation of Rs.409/share as estimated by one of the stock broking firm. BP will incur other capex costs as exploration projects proceed.

Stock valuation:
The deal looks like bringing in value and earnings in the long term for investors. BP will bring in it’s technical expertise and help RIL to optimize. RIL stock trades currently at forward (FY 12 estimated) P/E ratio of 12.8. Once the deal goes through, stock valuations may dip on account of shedding 30% share in east coast blocks. But this is expected to be recovered by cash consideration and rerating of blocks with BP’s technical expertise meeting RIL efficiency.

One may buy stocks of RIL for target price of Rs.1,175-1200 in next 1 year. I would update the valuations after regulatory approvals and more clarity on financials involved in deal.

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