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India Hydrocarbon Sector : The End of Beginning.
 

India Hydrocarbon Sector : The End of Beginning.

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Sum-of-Perspectives = { Insights + Relativity + Economics + Potential + Impact + Capital Market’s + Proxies + Transformation }

Sum-of-Perspectives = { Insights + Relativity + Economics + Potential + Impact + Capital Market’s + Proxies + Transformation }

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    India Hydrocarbon Sector : The End of Beginning. India Hydrocarbon Sector : The End of Beginning. Presentation Transcript

    • INDIA’s HYDROCARBON Iceberg ~ “ The End of Beginning “ Sum-of-Perspectives = { Insights + Relativity + Economics + Potential + Impact + Capital Market’s + Proxies + Transformation } Varun Goenka Equity Sales JM FINANCIAL Group. +09004670600 varun.goenka@jmfinancial.in
    • ~ Matters should be seen on some relative, not absolute, timescale : earthquakes last minutes , 9/11 lasted hours , but historical changes and technological implementations cause permanent creative-destruction A-Perspective / Relativity provides a better sense of Scale / Depth / Impact of Events / People / Ideas …. !! Sun is less than 1 pixel Júpiter is invisible at this scale!
    • Mental Models ~My Thought Framework Creative Diverse Influences Destruction Networking Psychology Fundamental Research Quantita Technical Research -tive Research Strategy Philosophy Humility with Voracious Reading Un-conformism Alternate / Tactical Research Diverse Sciences Perspective of History
    • Effort towards asking the Right Questions !! • 1. INDIA's Economic & Energy ~ Relative Position. 2. DGH ~ Perspective & Data. 3. INDIA Demand ~ Supply...... 4. Mckinsey Global Institutes : Demand Perspectives. 5. Economics of Hydrocarbons : Technology positioning , Cost Curves , Refineries , Project IRR's & Integration. ( Deutsche Bank Insights ) 6. Impact : Economy , Consumer , Industry. 7. Exchange rate Perspective. 8. Indian Proxies ( Preferred Plays ) : RIL Inds. ( Over the horizon ) , CAIRN , GAIL , Oil India , BPCL . 9. Competitive Positioning of Indian Proxies ~ ( Goldman Sachs Insight ). 10. Capital Market's Perspective : Capital Structure , Experience of Business Cycles , Price returns. 11. Khosla Ventures Perspective : Alternate Technologies. 12. Embedded , Implicit & Inevitable lurking ~ Black Swan(s)
    • Regional Economic Perspective Relative Regional Economic Position '09 Share of Share of FX Reserves Share of GDP (PPP '08 GDP ( 2008 Stock MCap. Share of World Region World Total World Total US$bn World Total $bn ) $bn ) '08 $bn Total (%) (%) (%) May'09 (%) World 61,939 100 56,584 100 26,702 100 6,235 100 Industrial World 34,872 55 39,688 69 21,331 80 2,215 36 of which: G7 29,039 46 32,221 56 17,970 67 1,544 20 Euroland 10,760 17 13,494 23 5,832 17 554 2 Emerging World 28,733 45 17,923 31 6,759 25 3,999 64 Non Japan Asia 15,714 25 8,524 15 3,411 13 3,013 48 Latin America 5,148 8 3,897 7 1,747 7 384 6 Eastern Europe 5,345 8 4033 7 1183 4 265 4 Middle East & Africa 2,526 4 1468 3 418 2 336 5 Relative Country Economic Position '09 Share of Share of FX Reserves Share of GDP (PPP '08 GDP ( 2008 Stock MCap. Share of World Country ( >$1trn ) World Total World Total US$bn World Total $bn ) $bn ) '08 $bn Total (%) (%) (%) May'09 (%) United States 14,265 23.03 14,265 25.21 9,568 35.83 49 0.79 China 7,801 12.6 4,402 7.78 345 1.29 2,089 33.51 Japan 4,399 7.1 4,924 8.7 3,087 11.56 993 15.92 India 3,252 5.25 1,210 2.14 499 1.87 251 4.03 Germany 2,901 4.68 3,668 6.48 1,089 4.08 38 0.61 Russia 2,216 3.58 1,677 2.96 331 1.24 386 6.19 UK 2,214 3.57 2,674 4.73 1,837 6.88 42 0.68 France 2,115 3.42 2,866 5.06 1,408 5.27 24 0.39 Brazil 1,916 3.09 1,573 2.78 520 1.95 194 3.11 Italy 1,834 2.96 2,314 4.09 524 1.96 35 0.55 Spain 1,405 2.27 1,612 2.85 649 2.43 12 0.18 Mexico 1,400 2.26 1,088 1.92 212 0.79 82 1.31 Canada 1,311 2.12 1,511 2.67 893 3.34 42 0.68 Korea 1,269 2.05 947 1.67 390 1.46 226 3.62 AGGREGATE 48,298 78% 44,731 79% 21,352 80% 4,463 72%
    • ASIAN Dependence How much Oil Induced !
    • Prod. ~82mn bbl / day , Consumption 84 mm bbl / day
    • INDIA ( ~ RIL Proxy !! ) 80% of Resource over 20% Area Recent Deepwater NELP VIII Auction of ~2.12bn boe were priced at $7.5/boe of E&D Cost. 80% of Resource in 20% of area
    • Is there a GDP Correlation !
    • Per Capita ‘ Primary Energy ‘ Positioning
    • Per Capita ‘ Oil Consumption ‘ Positioning
    • CHINDIA Perspective… 1mn tn Oil = 0.0063 bn boe ( India produces 0.24 bn boe p.a & China 1.2 bn boe p.a ) ~ India needs around 1bn boe p.a in total.
    • Oil Dependency Quotient 100% dependence ~= Pearl Harbor ! ; Significant Dependence = Deficits ! ; Exporter = Dutch Disease ! ~70% Acceleration drivers !!! Inflexion Point !
    • Coal dependence ~ Environmental & Efficiency Costs !!
    • Dependence coz ~ Perhaps less technical / political / accessible & cheaper
    • India’s Share ( % Primary Energy ) Divergence between 2008 1998 1988 Reserves / Prod. / OIL ( Mn bbl ) Consumption ! World Proved OIL Reserves % - 1258000 mn bbl '080.46% 0.50% 0.44% No growth World OIL Production % - 81.82 mn bbl/day '08 0.94% 1.00% 1.06% World OIL Consumption % - 84.45 mn bbl/day Substantial Growth 3.41% 2.66% 1.66% '08 supported by Composition of GDP (%, F2009) OIL Refinery Capacities ~ 88.62 mn bbl /day '08 3.38% 1.70% 1.43% imports Agriculture and allied activities 18.90% NATURAL GAS Agriculture 17.00% No / Marginal Mining & Quarrying 1.90% World Proved NG Reserves % - 185 tcm'08 0.46% 0.50% 0.45% Industry 23.80% growth in reserves World NG Production % - 3065 bcm '08 0.94% 1.00% 1.06% Manufacturing 14.60% / prod. Yet , Electricity, gas & water supply 2.00% World NG Consumption % - 3060 bcm '08 1.00% 1.08% 0.45% Consumption to Construction 7.30% Services 57.30% COAL Trade,hotels,transport & Comm. 28.60% World Proved Reserves % - 82600 mn ton '08 7.10% Financing, insurance, real Est. & bus. 14.80% Production has Community, social & personal 13.90% World Production % - 3325 mtoe '08 7.56% 7.04% 4.16% caught up Consumption to National Income Statistics World NG Consumption % - 3303 mtoe '08 7.00% 6.02% 4.10% grow substantially Nominal GDP (F2009, US$ bn) 1157 ENERGY CONSUMPTION Pop. (mn, F2009) 1154 Pop. Grwth (% CAGR, F'95-'09) 1.70% World Primary Energy Consumption ~ 11300 mtoe3.84% '08 3.06% 2.10% Per Capita GDP (F2009, US$) 1002 World Electricity Generation ~ 20200 twh '08 4.13% 3.53% Nominal $ GDP Per Capita Grwth 7.70% World Nuclear Energy Consumption ~ 1893 twh '08.57% 0 0.47% 0.32% (%, F1995-F2009)
    • Does INDIA have it !! ~ DGH ( Reports’08 - Initial Inplace Reserves ~130bn boe & Ultimate Reserves ~37 bn boe ) ~ which are actually ’03-’04 figs. !! KDM Research - Hydrocarbon Resources of Indian Sedimentary Basins (Figures in MMt) (O+OEG) ~ Risked + UnRisked [ ~ 2004 ] Basin Offshore Onland Total ( bn boe ) Mumbai (Mum) 9,190 – 9,190 131.3 Assam-Arakan fold belt (Aafb) – 1,860 1,860 26.6 Cambay (Cby) – 2,050 2,050 29.3 Upper Assam (Ua) – 3,180 3,180 45.4 Krishna-Godavari (K-G) 555 575 1,130 16.1 Cauvery (Cy) 270 430 700 10.0 Rajasthan (Raj) – 380 380 5.4 Kachchh (Kut) 550 210 760 10.9 Andaman-Nicobar (An) 180 – 180 2.6 Kerala-Konkan (K-K) 660 – 660 9.4 Saurashtra offshore (Sau) 280 M 280 4.0 Ganga valley (Gv) – 230 230 3.3 Bengal (Ben) 30 160 190 2.7 Himalayan foreland (Hf) – 150 150 2.1 Mahanadi (Mn) 100 45 145 2.1 Deep water (Dw) 7000 – 7000 100.0 GRAND TOTAL 18,815 9,270 28,085 401
    • DGH Est. ~ Up for Significant Revisions !!
    • DGH GAS Est. ~ Up for Significant Revisions
    • As per DGH ~18bn bbl boe ! ~18bn boe
    • DGH Est. of Exploration Status ‘ 06…( not much changed since )
    • BASIN Wise Dist. Of PEL Areas….
    • Discoveries ’00-07 as per DGH ~ Potential Output , Timeline , Market !!
    • GS Insight ~ Indian Supplier’s ( RIL & CAIRN )…competitive position
    • FORECASTING ~ A Necessary Evil VS Magnified Distortions
    • 30 yr : PRIMARY ENERGY PRICES ~ Crude / NG / Coal Was it Imaginable / Calculable ! What’s certain is an equally drastic environment in the next 30yrs
    • Oil Price Aggregate Forecast’s
    • Gas Price Aggregate Forecast’s
    • India GAS Demand-Supply ! Not exactly a cheap option
    • Opportunity ~ Demand – Supply ( 2 Est. )
    • Gas Supply ~ Whom are the chips with !
    • GAS Supply Forecasts…..What’ll be the demand-supply economics !!
    • But Can CHINDIA Surprise even the Optimists !! Can we estimate Industrialization rate , exponential innovation….What If assuming ~2% rate of change… 190 170 150 = X units 130 110 to predict 2040 in 2010, we would need to predict 2010 in 1926! Index 90 70 = X units 50 30 2040 10 1926 2010 35
    • OIL Consumption ~ Country Trajectory
    • CHINESE Commodities Bank
    • 21yrs of Oil Demand trajectory… 3 – to 11 mbpd in 21yrs… i.e 6.4% CAGR…( ie ~13%of total prod.~84mbpd OPEC & Middle East ( ) – if the same rate follows , Chindia share 22yr CAGR ~4% ) is ~50% of current production amt.
    • Select Insights from Mckinsey Global Institute Sep.’09 ( Forecasting a necessary evil ) Insights & Learning's : A. Sectoral Impact / Distribution & Growth drivers. B. CHINDIA Demand Impact. C. Consumption trajectory.
    • MGI ’09 Energy demand Model….
    • Demand Variables…
    • Where & Who of Energy Demand
    • Demand Drivers
    • Demand Revisions ( Who ! - Upward vs Downward )
    • Where & Who of Demand Impact !
    • Energy Consumption Inflexion Point ~ India at $1150+
    • Consumption Inflexion Point ~ India at $1150+
    • MGI Study substantiates the weightage of Auto’s in Oil Consumption
    • ECONOMIC Yada – Yada of Hydrocarbons I . Suppliers , Regional & Technological Cost Curves. II. Profitability , IRR’s & NPV of Major Project Domains. III. Technical Costs & Operating Leverage. IV. Refinery ~ Margin levers , Relative positioning, Size vs Scale. V. INTEGRATION ~ Perspective
    • Reserve distribution , Reserve / Replacement Ratio
    • RIL CoC has been Competitive right thru…
    • Supplier’s Economics
    • Oil Technologies ~ Cost Curves PETROBRAS in a lot ways is quite similar to RIL ~ however has grown a lot more inorganically. As in Jan.’09 its MCap. Of $97 bn.
    • Upstream ~ Regional Economics….
    • Oil Technology ~ Supply Curve
    • Profitability Equations… RIL’s 87% Acreage in Deepwater
    • DeepWater : Estimated vs Potential divergence !!
    • GS Insights & Estimates ~ from 190 Key Ongoing Hydrocarbon Project Capex •The industry continues to add new resources. The Top 190 Projects represent 300 bn boe of reserves ( an average of 1.6 bn boe per project) with a total investment of almost US$1.7 tn ( US$8.7 bn per project). The projects could deliver 33mn boe/d of oil and gas production by 2017E ( 26% of global oil & gas production). •The average project delivers a 17% IRR and 1.6x profit/investment ratio on our estimates. These projects represent advantaged investment opportunities for the industry and we estimate their delivery will lift the Majors’ net cash flows by c.30%. •Despite the Top 190’s advantaged nature, we expect pre-sanction marginal oil projects to require US$60-65/bl Brent and marginal LNG projects to require c.US$10/mcf to meet the companies’ hurdle rates. •The legacy is not what it could have been. Despite a 253% increase in oil price assumption from June 2003 to April 2008, the P/I and IRR of the original 50 projects are only up by 66% and 48% respectively, as a result of cost inflation, fiscal pressure and delays. The industry’s pre-sanction projects now have a P/I ratio marginally ahead of our forecast in June 2003. •The average project delay for the original 125 projects ( since February 2006) has been around 12 months and the average cost inflation is c.70%-80% over the same period. •We see two interesting delay dynamics emerging. First, a dramatic drop in the number of projects sanctioned from 2007 and second, an almost doubling of the time required for projects sanctioned to achieve first production. •Key beneficiaries of the higher oil price and cost inflationary environment are the host governments and the oil services companies in our view.
    • In Perspective of Mega E&P Assets , Return , NPV , Costs….
    • ~ Experience of Technical Costs over years
    • India NG Costs Competitive Position
    • InPerspective of Operating Leverage
    • Refining ~ A Necessary Evil towards Integration
    • Refinery ~ Alpha Insight ( RIL scores a ~100% ) Refining has long been the least favored child of the integrated oil company’s portfolio. Low return, low growth, capital intensive, politically sensitive and environmentally uncertain – the industry has perhaps appropriately been described by one leading refiner’s CFO as one of the world’s least attractive industries. Yet as an important link between upstream production and end consumer markets, refining has long been perceived as a necessary evil by the integrated oil companies and one that, if managed tightly with limited capital investment, can generate both healthy returns on invested capital and strong cash flows. What can earn the ALPHA in Refinery business !! ~ The below does not account for TAX BENEFITS !!
    • Complexity’s ~ simpler profits
    • Experience : Size vs Scale
    • Refinery Returns ~ 10 yr Returns 13-16% >> As evident even at Nelson Complexity of 11.5 , 8yr Cash Return is 15.5%.
    • INTEGRATION ~ Business Cycle optimization , continuity & Consumer Portfolio .
    • PETROBRAS Integration Vision Perspective ~ A highly-comparable to RIL
    • RIL’s Refinery Output Flow…
    • Integration : EPS Insensitivity…( Absolutely tolerable )
    • DOW CHEMICAL’s Integration ~ Business Cycle Sensitivity
    • Impact ~ Consumer & Industry
    • Top of the FOOD CHAIN…~ Perspective on depth of Impact on INDUSTRY
    • ~4%
    • ~7% +
    • Exchange Rate ~ Impact & Perspectives……..
    • Web of Global Trade ~ India a Negligible participant yet…
    • Analogy ~NG Trade Web
    • Influences of Scale vs Share : Control , Political Will , Efficiency & Strategy
    • Exchange Rate Perspectives ~ Of Growth & Gaps: The Oil &Dollar Cycle Revisited ( DB Research perspective ) • (i) The up-shift in recent years in the role of the dollar in driving oil and commodities reflects the declining share of the US in world activity; • (iv) The dollar and the global output gap generally pulled oil and other commodity prices in opposite directions in much of the 1980s and 1990s, resulting in relatively muted impacts on oil and commodity prices. Since 2000, both drivers have been moving closely in sync, pushing prices in the same direction; • (v) While investor attention is keenly focused presently on oil and commodities as hedges against possible inflation, it is perhaps useful to remind that during 1980-1999 (for almost 20 years) oil prices did not keep pace with inflation and fell in real terms; • (vi) Together the dollar and the global output gap explain 89% of the movement in oil prices since 2000; • (vii) The recent run up in oil prices has been well in excess of what the dollar and the output gap imply; oil prices look expensive even on a very rapid recovery and a significant further depreciation of the dollar. Oil prices would appear to already be fully discounting both a dissipation of all the current global slack and a further depreciation of the dollar to the bottom of its historical valuation bands. • (viii) Critical questions for the outlooks for oil and commodity prices are the distinction between growth and the output gap and how much downside the dollar has. While the consensus is now forecasting a return to positive growth in H2 2009 and oil and commodity prices have moved up in anticipation, history suggests it is not growth but the output gap that has driven oil prices. The consensus forecasts imply a very slow dissipation of the slack in the global economy. Of course, the previous cyclical peak in oil prices explained by the output gap and the dollar of $108 in June 2008 corresponded to a positive excess demand gap of 10% and the dollar at the bottom of its historical valuation trading band. Starting from current levels, a positive output gap of 10% would require many years of above trend growth for the world economy. Our view on the dollar remains for a firm to stronger dollar over the medium term.
    • Three channels of linkage between oil and the dollar There are at least three distinct channels of linkage between the dollar and oil (and other commodity) prices as we have spelt out previously. Formal statistical tests for causality between the two (not presented here) confirm that causality has indeed run in both directions, though most recently it appears to have been running from the dollar to oil. • First, the invoice currency effect sees causation running from the dollar to oil prices and predicts that declines in the exchange value of the dollar will raise oil prices denominated in dollars. Since crude oil transactions are conducted primarily in dollars, a depreciation in the value of the dollar (vis-à-vis other currencies) increases the purchasing power of oil buyers in non-dollar currency areas. If demand for oil by firms and consumers in these non-dollar currency areas has at least some demand elasticity with respect to oil prices in their own currencies and they represent a sizable share of world demand, when the dollar depreciates, their demand will rise. For a given supply, the market-clearing dollar price of oil should rise. Alternatively, a cheaper dollar raises the costs of producing oil for companies with non-dollar cost bases, also acting to raise the dollar price of oil that is marked up over dollar costs. Finally, to the extent that declines in the dollar lower the purchasing power of oil exporters (over goods and services produced in other currency areas), a decline in the value of the dollar provides an incentive for them to raise dollar oil prices. • Second, the petrodollar recycling effect sees causation running from oil prices to exchange rates and argues that higher oil prices would be associated with a weaker dollar. We have previously argued that this effect would be dollar-positive in the short run but negative over the longer run. An unanticipated increase in oil prices leads to a windfall gain for oil exporters. With most if not all of these countries pegging their exchange rates to the US dollar, the increase in oil prices results in an accumulation of reserves that is parked in the first instance in US dollar assets. Over time, however, if the oil price increase persists, oil exporters are likely to increase their spending. Trade patterns indicate these expenditures would be largely on imports from outside the US and be negative for the dollar. In our view, this channel has now evolved to be much faster as the stock of oil exporter reserves has grown. In particular, faster oil-exporter reserve accumulation with higher oil prices requires larger purchases of foreign currencies to maintain portfolio shares (without diversification). Of course, any diversification out of dollars would add to negative dollar pressure. • Finally, increases in oil prices will have differential effects on growth and rates of return in the major currency areas and therefore exchange rates. In turn, these would be impacted by potentially differential policy responses in the major currency areas, in particular the relative reactions of monetary policies. In this case, causation can also run from economic growth to oil prices. In our view, however, this channel has so far in this cycle been of limited significance though it might well become more important in the future.
    • INDIAN PROXIES ~ Preferred Plays
    • Who has How much of divested pie ~ till date !! 20% of co.s have 80%
    • Alpha & Omega [World Scale & World Class + State-of-art-Technologies + Integration +Global Competitiveness + Domain Leadership + Benchmark Project Execution + Financial Conservatism + Highest Standards of Health, Safety & Govt. + Consistent & Long-term Shareholder value-enhancement ]
    • Revisit Integration Slide > Industry Value-chain Impact…
    • 80/20 !!
    • RIL’s Humility vs Strategy vs Competence India's sizable upstream potential is unquestionable. From just ~4% of KGD6 block, RIL's 80mmscmd proposed gas production is equal to 0.5% of global or one-fourth of that of Brazil or Gulf of Mexico. It is estimated that this could add US$20bn to India's GDP, cut India's oil imports by 23% and add US$59bn NPV in government profit share and taxes - and yet this is the tip of the iceberg. Surely future contracts need to be closely coordinated between the buyers, sellers and the government, otherwise misalignments such as the current one may dissuade future exploration and exploitation of India's significant upstream potential. World’s largest Deepwater Project & India’s new production = 34% of Brazil’s current = 0.5% of world ( from mere small part of two blocks ) Reliance’s KG-D6 gas discovery was the world’s largest gas discovery in 2002. First gas from the KG-D6 is out. Initial gas production is expected to be 80mmscmd, which would double India’s current gas availability. In addition, there could be 40k bpd of oil and 9mmscmd of gas production from the MA field in the KG-D6 block. Similarly, Cairn India is scheduled to commence 175,000bpd of oil production from a small area of its Rajasthan MBA blocks, which has significant upside potential. Together, these should add 0.5% to the world oil equivalent production, which is equal to 34% of Brazil’s current production.
    • ~ Perspective as on Jan’08
    • Talent a key Asset at RIL ~ Crontonville !! L
    • ~ RIL’s deserves a high Capital Market Premium.... CONTINUITY & CONSISTENCY Reliance's balance sheet and cashflow position will allow it to weather a severe slowdown as well as lack of funding access. This is unlike STRONG & LARGE BALANCE- most peers which face cashflow pressures from either capex of debt repayments. RIL's D/E ratio stands at 0.3 ( inline with most Global SHEET Integrated E & P majors ), is on course to receive over $25bn of Cash-flow in the coming few years ~ which makes it further unlevered. Reliance has delivered an average 21% ROE in the last 10 years. While several companies have generated comparable of higher returns over HIGHER RETURN RATIOS this period, the few have done it as consistently like Exxon and BG trade at a premium to Sector & Market multiples. For Reliance, ebitda has nearly doubled almost every three years since FY90 and earnings Cagr has not dropped below 20% over any ten ENVIABLE TRACK RECORD year period in the last 30 years despite it being in commodity businesses. LESS CYCLICAL THAN Reliance’s earnings profile has not been cyclical – in stark contrast to even global marquee players like Dow, Valero, Exxon etc, whose COMPARABLES cashflow has remained hinged on the state of the underlying cycle. Global utilities trade at a substantial premium as compared to global E&Ps on EV/Ebitda multiples. Using these multiples as a benchmark STABLE CASH-FLOW for Reliance’s stable gas business cashflow, Reliance’s premium valuation would be justifiable. E&P would hence command a substantial share of RIL's Revenue / EBITDA / PAT portfolio ~ over 40% of Reliance's FY11 earnings are BUSINESS CYCLE ROBUSTNESS expected from natural gas. Reliance’s gas price being fixed would warrent least and more predictable earnings , hinging purely on volume ~ than players with volatility linked to underlying. RIL has time and again proved its ability to identify new-growth drivers. Having issued international 50 year , 100 year Bonds ~ it STRATEGIC CONTINUITY substantiates its really-longterm continuity. GROWTH Reliance has immense E&P promise (21 mboe+ of unrisked resources by some estimates ); especially as exploration intensity rises from mid-2009 E & P POTENTIAL and RIL would have substantial cash-flow towards Capex. Reliance’s past track record has been impressive by any standard. RIL is well integrated into major industrial & retail consumer sectors. Indian Demand is at an Inflexion point and mere a sweet-spot of the J- LOCAL DEMAND curve. Thus RIL has a huge-huge local demand at its door-step. Add to it , RIL does not have competitive , comparable scale peers. SUBSIDIARY / GROWTH RIL has substantial embedded option-value in its subsidiary initiative which are on the way towards building critical-mass : Retail , SEZ , DRIVERS Utility. CAPITAL MARKET RIL would and is commanding substantial visibility from the bourse perspective. Largest Mcap. Co. , highest weight in the key indices ~ it LARGEST ( MCAP ; INDEX would attract Global Sector Funds , ETFs , Insurance Co.s , Pension Funds over long-term which need Large-Cap. high-return ratio stable WEIGHT ) cash-flow companies. RIL is at the " End of Beginning " of another value-creation cycle ~ KG D6 & Integration of RPL with RIL. How the overhang of the RNRL EVENT LEAD DRAG vs RE - case has lead to its underperformance. Any result of the case would have the uncertainty out-of-the-way and so would be the prejudice of RATING Institutional Investors. RIL is relatively under-owned compared to its neutral weights in major market indices; FIIs have invested only ~7.5% of their holding in UNDER-OWNED Indian markets in Reliance – much lower than Reliance’s MSCI India neutral weight of ~13.5%. UPSTREAM MULTIPLES Upstream Multiples should expand going forth VS Downstream given the Crude forward curves & OPEC strategy. TO DELIVER HISTORICAL RoE Unlike to Global Integrated Majors , RIL would atleast for a few years continue to maintain its historical RoE's given the E&P value-creation. & COMPETITIVE TAXES Add to it , RIL is much better positioned on the Taxes VS Comparables , leading to higher equity-shareholder returns.
    • RIL Inds. Ice-Berg (Divestiture vs Conglomerate Integration ) E &P DOWN DISTRIBUTION SEZ LOGISTICS & CONSUMER ALTERNATE ( Oil & Gas ) STREAM UTILITY RETAIL TECH. Domestic Fuel Gurgaon NG Refining Textiles Bio-Fuels Acreage Retailing SEZ Pipeline Infra. Jhajjar Store SEZ Building Formats Material Internationa Petro- l Acreage Chemicals City Gas Jamnagar Product & Water SEZ Brand JV’s Tech. Sum -of - Parts ' 2010 ( Back-of-the-envelope ): E & P ~Rs.600-1000/share [ 7.5bn boe @ $3-5/boe = EQ ~Rs.100-170k crs. ] + REFINERY ~Rs.550- 700/share [ ( ~ 63-67mtpa/1.24-1.34mn bblpd / ~415mn bbl pa ) > ( @ $6-8 / bbl margin = ~12-15k crs p.a = ~EQ 100-120k crs at PE 8x-10x OR EV/bbl @ $1000-1200 = ~EQ 70-90k crs. ) + PETROCHEMICALS ~Rs.600-800/share ( ~12mtpa @ $250 margin @ 10x PE = EQ 100-130k crs. ) + SEZ ~33k acres planned ( Jamnagar + Jhajjar + Gurgaon >> EQ = Visible Invested Capital = ~3k crs. ) + RETAIL ( Target 100mn sq. ft / $25bn revenue > EQ = Invested Capital = ~8k crs. ) + TREASURY STOCK ~Rs.220-250/share ( ~ 40k crs. ) + INTEGRATION ( Logistical & Operational ) = BASE EQUITY VALUE ( 370-400K crs. i.e Rs.2250- 2400 / share ) ~ Conservative
    • RIL’s preview of an Alternate Technology…
    • RIL’s Dark side :: WALMART ~ GE… “ RIL’s dark side analogous any large-success stories like ‘ Wal-Mart & GE ‘. The aggregate impact ( + & - ) is incalculable ~ nonetheless what’s implicit is their impact on “ Entrepreneurship , Efficiency , Scale , Integration & Strategic mgmt. “ I. Lower Taxes : RIL’s has always had an extremely low-tax regime. Infact if cetirus paribus , RIL would have one of the most competitive tax structures in the E&P realm in the world. ( Intuitive defense : At the least , isn’t it good for shareholders ! ; Isn’t the incentive leading to higher absolute produce & productivity which more than makes up for the differential and has an additional qualitative impact ) II. Asset Takeovers : RIL is accused to have acquired some of the E&P assets at much-less than the plausible costs. ( Intuitive defense : Has & Would India Inc. done any better with the assets. Even if RIL has been gifted the Asset , it’s been well deserved ~ the results , the globally – competitive position has saved the country more than a decade. Also isn’t a favored-price to Indian Co. better than excess-price to Foreign Owner. ) III. RIL’s Conglomerate Size : Is it getting too big for itself to manage. ( Intuitive defense : We do have examples of much bigger size from the west. ) IV. RIL’s Continuity Faith / Corporate Governance : Nothing is invincible , specially not sub-standard corporate governance. ( Intuitive Defense : Does the Analyst world on average really understand such complex and integrated business-models. RIL has time again proved its continuity , substantiating further by issuing 50year , 100year International Bonds. ! )
    • RELIANCE INDS. ( Sum-of-Intellectual Biases ) SUM-of-LEADERSHIP = Potential f { Dhirubhai Ambani ( Visionary ) + Gandhi ( Father of Independent India ~ Energy ) + Lee Kuan Yew ( Transformational Leadership ) + Napoleon ( Tactical Warfare ) + MaoTse Tung ( Political & Military Strategist ) } SUM-of-HYPOTHESIS : GLOBAL ( At Relative-Value Arbitrage to developed world + Relatively undiscovered potential + Inevitable FDI's by Global Major + Long-term Forex Advantage ) + DOMESTIC ( Huge Domestic & Neighboring Country Current Demand + Demand from the said growing exponentially + Globally Competitive Cash Cost + World Scale Project realities + Available & Developing Logistical Integration ) + SECTOR ( Improving Political Will / Evolving Govt. policies towards inviting significant investments + Significant Capex ahead , but balance of leverage and strong internal cash-flows + Partnering Technology & Equipment Partners + Global Talent acceptability & preference towards Asia's careers ) + LEADERSHIP ( Competent& Inspirational leadership + Financial Conservatism + Intellectual Capital + Execution focused )…. SUM-of-COMPETITIVENESS , EXECUTION & DOMAIN LEADERSHIP = E&P ( Executed on the most Complex Deepwater projects at one of the lowest cost's / boe ) + Refining ( Executed the lowest cost & most advanced refinery in the world , competitive even with upcoming Middle-east subsidized-gas based projects ) + PetroChemicals ( Has one of the most competitive Petrochemical integration in the world , with Ethylene cash-costs being one of the lowest.) + Finances ( Has Globally competitive Cost of Capital , Tax Structures , Govt. terms ) + Leadership ( Ability to identify large & complex projects towards value-creation , new growth drivers at global scale ~ consistently ) 20XX SUM-of-ASSET ( Potential & Integration ) = E&P [ Domestic + Int. Acreage ~ ( 10bn boe reserve ) ] + REFINING [ ~65mtpa @ 12.5 NC , ~415 bbl pa ] + PETROCHEMICAL [ ~15mtpa ] + SEZ ~33k acres ( Jamnagar + Jhajjar + Gurgaon > ~100k crs+ Exports , ~40k crs Investment ) + RETAIL ( ~100mn sq ft , ~100k crs Sales , ~25k crs Investment ) + DISTRIBUTION ~ Fuel & Gas ( Fuel Retailing on Fuel price de-regulation + City Gas Distribution ) + LOGISTICS & EPC ( Gas Pipelines , Project EPC )
    • RIL ~ Integrated Rhetoric’s “ Dhirubhai envisioned Hydrocarbons in a period when OIL was below $30….!! Or did he have price-expectations !! “ STRATEGIC CONTINUITY How will RIL last MDA ! ; RIL has huge liquidity on its current BS and huge expected in the coming few years , how > can RIL deliver historical RoE's on such large-capital bases ! ; How would it forward-integrate into Industrial & Retail Consumer Markets ! ; How would its iInternational Assets INTEGRATION > integrate into RIL or Indian markets ! RIL's limited E&P discloure may be a calculated move for several intuitive reasons , Several opaque Subsidiaries have VISIBILITY > significant book & option value. ENDOGENOUS Re- Impact of DTC , GST , IFRS & Co.'s Bill. ( Will it cause it to De-Conglomerize ) Organization > Currency Impact ( How well is it prepared for Asian Currency realignment , a drastically weaker or infact a drastically EXOGENOUS Re- stronger dollar ). How exactly would it balance ( Eg. I > A Stronger Rupee = Lower Export value if billed in $ , cheaper for Organization > importer ~ will it be higher volumes. In addition ~ cheaper import from RIL's own International Assets , Technology , Equipment etc. ; Eg. II > A weaker rupee = Higher export value. ) ; A sub-$50 oil world ; At what scale and how fast is RIL moving towards Alternate Fuels , Building Material technologies , Agri & Life TECHNOLOGY > Sciences. NEW SCALABLE VALUE- Utilities , Organized Retail , Agriculture , SEZ's , Life Sciences !! CREATION Vehicles > Time-lines , Scale , Cost-Competitiveness vs CHINA. Supply-chain,Utility & Service Portfolio offering to SEZ > Manufacturers !! Does RIL want a Single Mega-sized Conglomerate or several Lean & more visible and comprehensible divestiture CAPITAL MARKET > companies !! Would RIL give the market new investment vehicles for shareholder wealth-creation !!. Several Global Assets available at competitive prices !! How would they be integrated into International E&P Assets INORGANIC INITIATIVE > and / or Indian Markets !! Given the Scale of Ambitions , one of the key Assets of RIL would be Talent ; How does it intend to grow Local Talent TALENT MGMT. / Import Global Talent ; RIL needs a Crontonville.
    • ~ All @ MCap. 265k crs.!!
    • Globally Comparable
    • GAIL ~ Integrated Player (NG/LPG ; Transmission ; NG ; Trading ; LPG & OLHC ; Petrochemicals ; E&P ; City Gas ; Power ; GAIL Tel )
    • Other Businesses Yet to scale / show up…..
    • ~ GAIL’s Integrated Perspective
    • CAIRN India
    • Pure OIL ~ Non-Integrated / Single Asset / Efficient Play
    • OIL India ~ Bourse’s New Discovery ( Mini-ONGC + Higher Efficiency & Execution )
    • BPCL ( An leading PSU Refinery + Large Embedded E&P Option value )
    • India SUBSIDY Framework ~ Reality Check !!
    • ~ Oil Price Leverage VS Subsidy reality
    • Economics of Fuel Retailing…
    • ~ Relative Competitiveness of Indian Assets
    • E’10yr ~Cash Flow
    • Capital Market ~ Perspective
    • Integration ~ Premium
    • Share of Oil & Gas in S&P 500…
    • Earnings Contribution….
    • In Perspective of “ Cost-of-Capital ” ~
    • Test of time ~ InPerspective thru Business Cycles…
    • Shareholders a Bigger challenge > business cycles
    • ~14% CAGR 40 Energy Stocks ~11.5% CAGR
    • Understanding Where we are & where its going is where “ Judgment & Experience “ comes !! TOOLS
    • INDIA Inc. & Vinod Khosla will inevitably cross paths !! ( Revisiting INTEGRATION slides can lead to how this fits into the Bigger Picture )
    • “ But in all my experience, I have never been in any accident. . . of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort. “ E. J . Smith, 1907, Captain, RMS Titanic INDIA’S HYDROCARBON could { Scale up , have deeper Impact , have more stakeholders engaged } faster than our linear-excel world can incorporate……..
    • The human mind suffers from three ailments as it comes into contact with history, They are : A. The illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize; B. The retrospective distortion, or how we can assess matters only after the fact, as if they were in a rearview mirror (history seems clearer and more organized in history books than in empirical reality) ; C. The overvaluation of factual information and the handicap of authoritative and learned people, particularly when there is categorization & inferences.
    • • A. We focus on pre- selected segments of the seen and generalize from it to the unseen: the error of confirmation. • B. We fool ourselves with stories that cater to our Platonic thirst for distinct patterns: the narrative fallacy. • C. We behave as if the Black Swan does not exist: human nature is not programmed for Black Swans. • D. What we see is not necessarily all that is there. History hides Black Swans from us and gives us a mistaken idea about the odds of these events: this is the distortion of silent evidence. • E. We "tunnel": that is, we focus on a few well- defined sources of uncertainty , on too specific a list of Black Swans (at the expense of the others that do not easily come to mind).
    • EXOGENOUS BLUE & RED ~ SWANS Probable's ENDOGENOUS !! GLOBAL + -  Drastic Depreciation in $ ~ leading to higher Oil & Gas prices ,  Drastically stronger $ ~ leading to lower Oil & Gas prices , increased supply. ; cutting-off of non-competitive capacities ~ however a  Demand & Logistical Economic-viability for International E&P lower stabilized price. Co.s / and Assets to export India coz of demand & currency  Accelerated scaling up and supply creation of competitive favorables. ; RED SWANS alternate-fuels.  Global Hydrocarbon Talent to be attracted to India. ;  Mis-reported / Mis-calculated Resource reserves &  Significant FDI in Upstream & sector-services ~ global majors to invest in Indian Assets to meet their portfolio hurdle-rates. ; potential.  Flow of World-class Technology , Equipment & Services to India  Large & Subsidized refinery capacity addition in Middle ~ leading to increased efficiency and successes. ; 6. Increase in East & China. Sector & Indices weights leading to further global capital allocation. Natural Gas driven Air , Surface & Marine ~ transport technologies. LOCAL + - India significantly reducing Energy Import dependence due to Mis-reported / Mis-calculated Resource reserves & increased domestic production / Significant resource addition / potential. discoveries by domestic upstream-players. Nationalization of key E&P assets. Demerger of E&P / Refinery Assets of PSU's from Subsidy-loaded Increase / Levy of Taxes on E&P Assets. fuel retailing and distribution ~ Govt. maximizing Capital-Market Withdrawal , opaque-ness of project-incentives. Market Cap. by divestiture of loss-making / subsidy. Substantially higher or lower fuel price to Impact OMC's Integration-Amalgamation-Synergy of AMBANI brothers. Lowered Cost of Capital due to financial sector reforms. drastically. Partial Divestiture of E&P assets by companies to Int. Majors Large domestic refinery supplier-capacity coming on- leading to monetization & increased visibility. stream. Significant appreciation of Rupee ~ import of energy and products Unfavorable govt. profit-share contract terms. from international assets cheaper , import of technology & services Execution delays in Large Gas-based projects. cheaper . M & A ~ In a long term rupee appreciation scenario , Out- Bound acquisitions to imply lesser costs of long-term. Rationalization of target Subsidy beneficiary ( Even railways buying fuel from OMC’s at Subsidized rates ).
    • FINAL THOUGHTS ON THE HYDRO-CARBON BUSINESS VALUE-CHAIN SECTOR • It is the one of the most globalized sectors of all ; having immense local and international political influence and involvement. • It has been the cause of several global conflicts and would continue to remain of strategic importance. • Countries with domestic-resources and lesser or no export dependence are plush with foreign exchange reserves ~ an alternative view is that , they suffer from ‘ The curse of Oil or Dutch disease ‘. • Is the back-bone sector of the economy , having substantial impact on the country’s balance sheet , critical macro-variables and purchasing power. • Is a primary vehicle of ‘ Capital formation ‘ ; can absorb significant amount of capital and deliver the return hurdle-rates for long periods of time. • Is embedded & integrated well into the survival and functioning of both large & small industrial & retail consumers. • Is a primary vehicle of large employment opportunities for the country. • It is the blood-line of the Commercial & Passenger Transport industry. • Have been able to generate consistent & large Return Ratios even on larger bases for long-periods. • International foreign exchange equations are of critical importance for demand-supply destination & volumes. CAPITAL MARKET • Has significant weight in the Key Market Indices Worldwide. • Has delivered significant return of long-periods with relatively less volatility can some of the other high-return industries. • Global Majors have managed their earnings volatility visa vs the underlying with robust-integration and supply chain optimization. REGULATION • It is the most regulated and govt. influenced sector of the economy. • Given the assets belong to the nation and in some countries are nationalized ~ govt. terms of contract , taxes , royalties are significant incentives & motivations.
    • An 80/20 Recap ~ few preferred slides…Hyperlinked SLIDE SLIDE India's Competitve Position ~ Key Upstream 25 Project Summary 78 Oil Refinery Concept ~ Industry impact depth. Sector Consumption Sweetspots vs $GDP 47 /Capita 98 RIL's Industry Integration 50 Global Energy Industry road-map. 108 RIL's E&P Potential Return Hurdle Rate / WACC for Global Majors 52 ~ RIL positioning. 110 RIL's Capital Market Premium 53 Industry Planners ~ Oil Price Perspective 111 RIL ~ Divestiture vs Conglomerate 54 Upstream technologies ~ Cost Curve. 114 RIL's Integrated Rhetoric 55 Upstream Regional Economics ~ Asia Edge. 118 GAIL Integrated Player 56 Transportation Fuel ~ Cost Curve. 130 CAIRN ~ Rajasthan Future Potential 57 New Project Economics ~ Technology Leverage 144 Oil Price Leverage vs Subsidy Reality Upstream Projects ~ Key Technology- 60 Economics Summary 148 Economics of Fuel Retailing Relative Competitiveness of Indian Proxies vs 61 Experience of Technical Costs 149 Global Majors. 62 Natural Gas Cost's ~ Country positioning. 169 Valuation Indicators of Global Energy Majors. 65 Refinery ~ Alpha Insight 177 Traditional vs Complexity ~ Economics 73 Petrobras Vision & Perspective of Integration. 179 Blue & Red SWAN ~ Probables.
    • Varun Goenka Equity Sales & Advisory. JM FINANCIAL Group. M – 09004670600 E – varun.goenka@jmfinancial.in Capital Markets are a ‘ Time-Machine ‘ which transports , Long-term capital- resource , through hybrid-vehicles to an entrepreneurial-destination , to achieve mutually agreeable capital-formation hurdle rates within an acceptable risk & time - frame. Disclaimer: The information contained in this email has been prepared solely for your information and is not an offer or solicitation of an offer to buy/sell any securities/instruments mentioned or to participate in any trading strategy. JM Financial and/or its affiliate companies may deal as principal in its own name or act as a market maker for securities/instruments mentioned or may advise the issuers. This is not a research report and is not from JM Financial Research but it may refer to a research analyst/research report. Unless indicated, the views are of the author's personal views and may differ from those of JM Financial’s Research or others in the Firm. We do not represent that the information contained herein is accurate or complete. Information is subject to change without notice and we may not update this. Past performance is not indicative of future returns. No portion of this email or its attachment(s) shall be forwarded or distributed to any person without our prior written approval. You may not use email to request, authorize or effect the purchase or sale of any security or instrument, to send transfer instructions, or to effect any other transactions. This email is solely for the addressee(s)/intended recipients and may contain confidential information. Sender does not intend to waive confidentiality or privilege. If you have received this email in error, please destroy immediately and notify the sender.