1. 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
2. ~ 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!
3. 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
4. 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)
5. 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%
8. 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
27. 30 yr : PRIMARY ENERGY PRICES
~ Crude / NG / Coal
Was it Imaginable / Calculable ! What’s certain is an equally drastic environment in the next 30yrs
35. 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
38. 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.
39. 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.
54. 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.
59. 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.
65. 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 !!
87. Influences of Scale vs Share : Control , Political Will , Efficiency & Strategy
88. 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.
89. 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.
107. 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.
112. ~ 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.
113. 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
115. 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. ! )
116. 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 )
117. 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.
173. Understanding Where
we are & where its going
is where “ Judgment &
Experience “ comes !!
TOOLS
174. INDIA Inc. & Vinod Khosla will inevitably cross paths !!
( Revisiting INTEGRATION slides can lead to how this fits into the Bigger Picture )
175.
176.
177.
178. “ 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……..
179. 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.
180. • 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).
181.
182. 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 ).
183. 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.
184. 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.
185. 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.
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