Reliance Industries - Niko upgrades KG D6 reserves; aligns with RIL's estimate - Ambit

Niko Resources has increased KG D6 gas reserves estimate by ~100% based on independent consultant reserve evaluation report. This increase follows last year move to cut 1P/2P reserves by 72%/76%, respectively, whilst RIL had reduced 1P reserves by only 7%, as Niko follows stringent US reserves reporting rules which RIL is not required to adhere to. Hence, with this revision, Niko's reserve estimate is likely to be aligned to RIL's estimate. We are already factoring in the reserves disclosed by RIL; hence Nikos' upgrade is only sentimentally positive for RIL and does not impact RIL's earnings and valuations.

Event: Niko Resources has upgraded its oil and gas reserves based on the reserve evaluations report received from independent petroleum engineering firms. (http://www.nikoresources.com/upload/news_release/262/01/niko_pressrelease_2013_06_13_reserves_explorationupdates-5.pdf). Based on the report, Niko has increased its proved (1P) oil and gas reserves by 160% to 0.5tcf and its proved plus probable reserves (2P) oil and gas reserves by 110% to 0.8tcf.

Niko has not yet quantified the breakup of the reserve increase across various blocks but has stated that it relates to Niko's following blocks: (a) RIL's KG D6 and NEC-25 blocks in India, (b) Block 5(c) in Trinidad and Tobago, and (c) Block 9 in Bangladesh. However, given that most of Niko's reserves consist of KG D6 reserves, a significant jump in reserves could be on account of an upward revision in KG D6 reserves. Niko has mentioned that: (a) no revision has been made to the KG D6 proved reserves and (b) positive revision has been made to the KG D6 proved plus probable reserves. Niko owns 10% stake in RIL KG D6 block.

Our view: Note that Niko had reduced its 1P reserves estimate by ~72% and 2P reserves by 76% in June 2012 whilst RIL had made only 7% reduction to its 1P reserve estimate last year. RIL does not disclose the 2P reserves estimate. The key reason for the drastic cut in Niko's estimate last year, while minimal change in RIL's estimate was primarily on account of the stringent US reserves reporting rules that Niko has to follow (because it is a Canadian company) which RIL is not required to adhere to.

Hence, with this revision, Niko's reserve estimate is likely to be aligned to RIL's reserve estimate. We are already factoring in 5tcf of reserves for KG D6 block (as disclosed by RIL) in our earning and valuation. Hence, this reserves estimate does not impact our earnings and valuations and is only sentimentally positive for RIL.

Source : Equity Bulls

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