Good E&P news flow to restart but risks to refining recovery
Risks to refining recovery but good news on E&P likely
In June 2010, we upgraded Reliance Industries (RIL) to a Buy as we expected
refining margin recovery, 2-year EPS CAGR of 28% and positive E&P news flow.
We have assumed 18-24% YoY rise in RIL’s FY11-FY12E refining margin.
However US economic slow down or a double dip recession are risks to refining
recovery and EPS growth especially in FY12E. However positive news flow on
E&P in terms of discoveries and reserve rise appears likely. A hike in KG D6 gas
price also cannot be ruled out. We retain Buy on RIL.
Upside to KG D6 & NEC-25 reserves; MN D4 may have 100tcf
RIL’s partner Niko Resources has said it expects significant reserve rise in KG D6
and NEC-25. KG D6 2P reserves and 2C resource estimate does not factor 10
discoveries while NEC-25 2C estimate does not factor in 9 discoveries. Revised
estimates are expected in June 2011. Niko has also indicated that prospective
gas resources in Mahanadi D4 (MN D4) may be 100tcf (2.5x KG D6 current inplace
of 40tcf). First well in this block is planned in 4Q 2010. We have valued
exploration upside in KG D6, MN D4 and two other blocks. However if MN D4
lives up to expectation it would be worth much more than our exploration upside
valuation. It will however take a few years to know if it lives up to expectation.
Double dip risk to FY12E refining margins and EPS growth
Reuters’ Singapore complex refining margin to date in FY11 is 14% higher than in
FY10. Diesel cracks and light-heavy crude spread, which matter even more to
RIL’s refining margin, are up even more sharply to date in FY11. However the
expected slow down in the US economy or a possible double dip is a risk to our
FY12E refining margin of US$9.7/bbl and EPS growth of 30.5%.
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