Reliance Industries Limited - Event Update - K R Choksey

Why fall in gas reserve won't affect the market value of RIL?

Recently Niko resources have cut 2p reserve estimates from the KG D6 block by 80% from 9.3tcf to 1.9tcf. This is impacting current valuation of KG-D6 block ~Rs 20/share based on the gas rate of $4.2/mmbtu, on positive note NIko mentioned probability of significant upside of 6.1tcf from contingent resource discoveries at D6, NEC 25 and satellite fields. At the same time RIL, Partner to invest $4bn to develop satellite fields which will improve gas production from KG block.

RIL will produce ~60mmscmd by FY15 from KG block

AGM note suggested Reliance Industries hopes to produce an additional 30 mmscmd of gas at its KG D6 field off India's East coast. This will improve Oil & Gas segment EBIT by 20% and overall positive impact on EBIT would be ~5%. We rule out any possibility of RIL gas production fall below 25mmscmd and we do not agree with Niko guidance on production from KG block.

Strong case: Gas price hike could make up for hit from lower reserves

Press reports suggest EGoM is considering KG D6 gas price hike before April 2014. KG D6 gas price hike to $8-9/mmbtu would make up for lower reserves, Gas prices in nearby countries like Thailand and China at $6-7.5/mmbtu are higher than $4.2/mmbtu in India. we believe this is strong case of gas price hike from current level to $8/mmbtu ( considering market rate & cost of production), any price hike impact on reserve revaluation will offset reserve downgrade.

Valuation: We believe in improvement of GRM; expect pickup in regional margins in 2H CY12. Any gradual recovery in downstream demand and improvement in global operating rates would be a positive trigger for petchem. We recommend Accumulate on RIL with price objective of Rs 800/share.

Source : Equity Bulls

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