Reliance Industries - Fresh government approvals a positive - Edelweiss

As per media reports, the KG-D6 Management Committee (MC) on Tuesday (August 7, 2012) approved budget for FY11 and FY12, capex of USD1.06bn for FY13 and development of three unapproved discoveries with certain conditions. We are positively surprised that the government has permitted development work to begin without completion of appraisal, indicating its concern on falling gas production. This implies that field development may be completed earlier than our assumption of FY16 end. While NPV impact is limited given upstream contributes only 4% of incremental FY12-17E EBITDA, we see this as a sentimental positive. We reiterate our highconviction, anti-consensus 'BUY' on RIL, noting that our worst case value of INR707 and base case value of INR906 make the risk-reward favourable.

Event: The MC yesterday approved the following: (a) budget for FY11 and FY12; (b) USD1.06bn capex for FY13 (bulk of it for D1/D3/MA production and development); and (c) development of three unapproved KG-D6 discoveries (D29, D30 and D31). However, capex for these three discoveries will be recoverable only post complete appraisal.

View: We note that DOC approval for the three satellites is needed before RIL-BP can submit an Integrated Development Plan in Q3FY13 to develop all satellite discoveries in KG-D6. BP in its recent earnings call stated that all satellites together could add 5tcf plus. The JV also plans to submit RFDP for D1/D3 in KG-D6 in Q2FY13 to maximise recovery.

Government's approval for development work before completion of appraisal implies that field development may be completed much earlier than our FY16 end estimate. While FY13 capex numbers look higher than our USD350mn estimate, our lower capex assumes continued decline in production (15% YoY decline bottoming out at 15.5 mmscmd in FY16). Though unconfirmed, we anticipate higher than estimated capex may lead to a lower decline rate of production, more than offsetting the capex spend.

Outlook and valuations: Limited downside; maintain 'BUY' Our base case value for RIL's India E&P at INR117/share (of which KG-D6 is INR62) assumes 2tcf from KG-D6 D1/D3/MA fields, in line with that of Niko/BP. Even assuming a two year delay in government approvals, worst case upstream value is INR106/share. While RIL's stock price has been impacted due to negative news around its upstream business, we note that India E&P is estimated to contribute only 4% of incremental EBITDA over FY12-17. Reiterate 'BUY/SO' with fair value of INR906.

Source : Equity Bulls

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