No clear thumbs-up from brokerages to Reliance-BP deal

Our Bureau Chennai | Updated on March 12, 2018


Reliance Industries displayed a strong show at the bourses despite several brokerages issuing a mixed outlook on the stock following the company's $7.2-billion deal with BP.

BP Plc agreed late on Monday to buy a 30-per cent stake in 23 oil and gas blocks owned by Reliance Industries.

The stock, which touched a high of Rs 1,008.65, closed at Rs 985.05, still a gain of 3 per cent over the previous day's close of Rs 956.5.

JP Morgan, which reiterated is overweight recommendation on RIL, said: “We take a positive view of the deal, as it validates the value of RIL's E&P portfolio and should be a catalyst for stock performance. The partnership with BP will address concerns on potential production ramp-up/reservoir quality issues.”

According to Bank of America-Merrill Lynch, “Problems with KG D6 ramp-up and KG D9 dry wells meant RIL's E&P valuation was de-rated. RIL therefore did not participate in the refining and petrochemical rally in the last six months. RIL's share price (Rs 956) is closer to our bear case fair value of Rs 923 (lower E&P) rather than base case (Rs1,193). We believe this deal will bring in lot of benefits and also help re-rate RIL's E&P valuation.”

Daiwa Securities, which maintained outperform rating on Reliance Industries, said: “We believe the current transaction is a significant positive for the stock, as it provides a benchmark for the valuation of the E&P business. We think the next positive catalyst for the stock lies in further clarity on the gas output ramp-up strategy. We see the key risk as lower-than-expected gross refining margins.”

“The transaction, besides being a near-term positive catalyst for RIL, is also a longer term positive for the development and growth of the gas sector in India. The creation of 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),” said a note from Citi.

Not all convinced

However, UBS maintained its neutral view despite the deal. “We value Reliance's upstream business, including the exploration option, at $26 billion. BP will pay $9 billion (7.2 assured + 1.8 contingent) i.e. no premium for 33 per cent of this. The deal looks EPS neutral for Reliance as interest income will make up for loss on EBIT, though the earnings quality will deteriorate.”

It further added the “lack of clarity on the use of $10 billion ($3 billion existing cash + $7.2 billion from the deal; 15 per cent of market cap) may remain an overhang on the stock.”

Kotak Securities maintained its ‘reduce' rating and said: “We are not sure of the avenues available for RIL for deploying the large cash flows generating from operations, along with the consideration from BP Plc.”

Published on February 22, 2011

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