Friday, 11 March 2011

Mukesh Ambani’s Reliance Industries inks $7.2 billion deal with BP

Mukesh Ambani, (C)  Chairman and Managing Dire...
Image by AFP/Getty Images via @daylife
Billionaire Mukesh Ambani, India’s richest resident, pulled off what some analysts see as a coup today by signing a partnership agreement between BP and his Reliance Industries, India’s most valuable company.

The British oil major has agreed to pay $7.2 billion for a 30% share in 23 oil and gas blocks that Reliance operates in India, including KG-D6, the country’s largest gas reserve. The agreement encompasses the formation of a new, equally-owned joint venture to source and market gas in India.
The two parties termed their new partnership as “ historic and transformational”, touting it as one of the largest foreign investments in India in recent times. While BP will pay $7.2 billion upfront , Reliance could get upto $1.8 billion more as performance-linked payments. The 23 blocks which all lie offshore, in depths ranging from 400 to 3,000 metres, cover 270,000 square kilometers, the largest private sector exploration acreage. .
BP and Reliance are no strangers to each other. The British giant has been working with Reliance since 2008 on a deepwater block in the Krishna Godavari basin that they co-own. This broader alliance with BP, under discussion for two years, is expected to significantly boost Reliance’s current output of 1.8 billion cubic feet of gas per day, amounting to over 40% of India’s total production.
Analysts said that BP will provide much needed deepwater exploration expertise to Reliance which has been struggling to ramp up production at KG-D6, its biggest block which lies off the east coast. In a post-transaction note, analyst Niraj Mansingka of Edelweiss Securities predicts that “This collaboration will lead to accelerated natural gas production, higher discoveries, and increase in gas recovery rates.”
Reliance on its part acknowledges that it needs BP to further its energy ambitions. The Business Standard newspaper quoted Ambani as saying, ” “These guys are the best (in exploration). If you want to climb Mount Everest, make sure you have the best Sherpa with you.”
The news of the deal is expected to provide a kicker to Reliance’s stock price which has been languishing for a while. “ Reliance has been underperforming for two years. This transaction is well-timed, “ said a Mumbai stockbroker. Mansingka of Edelweiss estimates a 21% upside on Reliance’s current stock price of Rs 956.
Involving as it does, significant national assets, the BP-Reliance deal will require approval from the Indian government which has lately been reeling over the backlash from the 2G telecom spectrum scam. Metals and mining billionaire Anil Agarwal’s bold move into energy with his $9.6 billion deal to acquire Cairn Energy’s Indian assets, has been in a limbo for months as it awaits the government’s green light.

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