Reliance Industries Limited - Transition to fair value more certain - Antique

Niko raised 1P/2P reserves by ~160%/110%, RIL can see upside

Niko Resources, 10% stake holder in RIL/BP consortium operated KG-D6 and NEC-25 blocks has announced reserve up-grades based on final draft received from third party certifiers. The company raised its proved (1P) reserves by ~160% to 550bcfe and proved plus probable (2P) reserves by ~110% to 800bcfe with upgrades from India, Bangladesh (1P in Block 9) and Trinidad. While producing D1/D3/MA fields in KG-D6 do not have 1P up-grades, 2P reserves have some positive revisions. R-Series and Satellites in KG-D6 block and NEC-25 block as a whole have significant 2P addition due to reclassification of contingent resources (2C) into reserves.

Reclassification of Satellite-1/NEC-25 2C to 2P on FDP submission

The RIL/BP consortium has submitted FDP for R-Series and NEC-25 block which has led to Niko reclassifying 2C as 2P for the same. The OFDP for Satellite-1 was already approved with G2 well being successfully drilled. We note that Niko's current up-grade follows last year's 56% cut in 2P reserves to 377bcfe. In FY13 RIL has not made any major revisions in reserves. Hence, we believe Niko's up-grade is a reversal to last year's cut by accounting existing prospects in R-Series and Satellites in KG-D6. However, NEC-25 block could provide upside to RIL.

RIL's E&P outlook positive on MJ-1 discovery, impending gas price hike

We model our estimates based on gross gas output ramp-up to ~50mmcmd by FY18e which already accounts for FDPs under approval like R-series and NEC-25. We however estimate MJ-1 discovery to hold 0.82tcfe of gas and 56Mmbbls condensate based on Niko's best case estimate and value it at additional INR10-14/sh on RIL's SoTP with monetization in 3-4 years. We expect Govt. decision on natural gas price revision soon as has been indicated by MoP&NG as well as Finmin with the former suggesting USD6.78/mmbtu price for all domestic gas. Though gas price hike effective Apr-14 is built in our estimates, announcement on same will be a positive trigger for the stock.

Sharp recovery in GRMs to ~USD8/bbl to help sentiments, though estimates remain intact

Singapore GRMs which fell to ~USD4/bbl levels during April have sharply recovered back to USD8/bbl due to strong summer demand and higher refinery outages in Asia, accompanied by capacity cutbacks by East Asian refiners. We believe the recent margin uptick is likely to maintain RIL's GRMs at ~USD9/bbl range in FY14e, in line with our estimates and further with rupee deprecation, refining EBIT is likely to remain stable going forward. Medium term margins would however be governed by pace of capacity additions/ mothballing and price/demand environment.

Maintain HOLD with a target INR880/sh

We maintain our HOLD rating on RIL with a target price of INR880/sh based on SoTP valuation. We marginally revise up our target price, assuming a weaker rupee at INR54.5 in FY14e. INR1/USD change in rupee impacts RIL's FY15e EPS by ~3% and target price by ~INR25/sh. We believe the current positives could help the stock price align more towards its fair value.

Source : Equity Bulls

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