Reliance Industries Limited - Smoothening E&P, volatile refining; Maintain HOLD - Antique

MJ1 encounters gas, a positive but preliminary development

As per media reports, the MJ1 well which was spud in early March has encountered natural gas. The well is part of a proposal to enhance output by targeting deeper reservoirs in the existing D1/D3 fields through fresh drilling following Govt's approval on the same in February. We believe this is a positive development though further testing and development is required to get a clearer resource picture and timelines on production. As per pre-drill estimates provided by Niko Resources (10% stake in KG-D6), the best case gross prospective resource stands at 819bcf of gas and 56Mmbbls of liquids. This well is also on sole risk basis.

RIL-BP has submitted integrated enhancement plan for KG-D6 to salvage output

RIL-BP has announced USD5bn+ investments in KG-D6 block over the next 3-5 years to augment development of 4tcf of discovered gas resources. As part of this integrated enhancement plan, FDP for R-Series and other satellite fields has been submitted; G2 well in Satellite 1 field was successfully drilled and critical work for booster compressor and MEG up-gradation was started besides the MJ1 well. As per latest reports, RFDP for MA field has also been approved which involves drilling of a new gas well (MA-8) and work over of 2 suspended wells to enhance the output.

Material recovery in KG-D6 output is still 3-4 years away

We expect material recovery in KG-D6 output only by FY16-17e as development of freshly explored prospects would take 3-4 years. The KG-D6 field optimization plan though compression and water handling and MA redevelopment plan is likely to arrest output decline in FY15e followed by some marginal recovery as well. However we expect 20-30mmcmd of incremental output from the block only post development of Satellite 1, R-Series and other satellite fields which is in line with RIL's guidance of incremental production by FY17e. Further certain approvals pertaining to D-29, 30, 31 satellite discoveries in R-Series and pricing are crucial to attain envisaged production target.

Refining performance to remain volatile

4QFY13 witnessed benchmark GRMs jump on the back of seasonal maintenance, shutdowns and other factors which reversed as the quarter ended resulting in margins crashing by ~50%. We believe shutdowns and outages would affect GRMs going forward on the back of a weak petroleum demand scenario. Medium term margins would be governed by pace of capacity additions/ mothballing and price/demand environment. We estimate RIL's GRM at USD9.1/9.2 per barrel for FY13/14e.

Maintain HOLD rating on RIL with a target price of INR875

We value RIL on a SOTP basis and keep our estimates unchanged. We maintain our HOLD rating on the stock with a target price of INR875/sh.

Source : Equity Bulls

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