Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd
IN-LINE (unchanged) Price target: 1100
Summary
Reliance Industries (RIL) 2Q FY11 results were in line but, more importantly, it did not provide any further clarity on
timelines for D6 ramp-up with limited progress on other development plans (D6, satellite, NEC). The recovery in
refining as well as petrochemicals made up for the decline in Oil & Gas EBIT, which was impacted by decline in
Panna-Mukta volumes. We maintain our estimates and reiterate In-Line as we see limited triggers (except drilling in
KG-D9) and the risks on earnings are balanced (potentially slower gas ramp-up offsetting any upside in refining).
Results: key points
2Q earnings in line with estimates- RIL reported 2QFY11 earnings of Rs49.2bn (up 28%yoy
and 1%qoq), which was in line with street estimates. Operating profits for the quarter were at Rs
93.9bn (up 30%yoy and 1%qoq).
Recovery in refining … - RIL’s Q2 refining EBIT, at Rs21.9bn (up 63%yoy and 8%qoq), was
driven by recovery in GRMs - US$7.9/bbl vs. US$7.3/bbl in Q1FY11 and continued high
operating rates of 109%. The GRMs were, however, in line with expectations.
….compensated for muted petchem…: Petrochemicals EBIT (+7% qoq) was supported by
lesser impact of cracker shutdowns in 2Q (25KT of ethylene/PE production lost in 2Q vs. 135KT
in 1Q), which made up for the pressure on polymer margins (ex-PVC) due to new global
capacities coming on stream. In our view, the margin outlook could worsen in the next six months,
given further proposed capacities, although RIL’s performance is expected to be aided by the
return to full production 3Q onwards. In contrast, polyester chain profitability gained strength
during the quarter driven by higher cotton prices as well as extremely strong domestic demand.
This, coupled with higher PP production from SEZ refinery, aided in RIL delivering sequential
EBIT growth from the petchem segment.
…and declining Oil &Gas EBIT: Oil and gas EBIT declined 11% qoq to Rs 17bn. During the
quarter, Panna-Mukta production was impacted by shutdown in production (down 78% yoy and
qoq) given failure at sub-sea hose, which shut oil and gas production between 20th July-25th
October 2010. Tapti gas production at 674mscm was down 15% yoy and 14% qoq on the back of
ageing reservoir. D6 volumes remained broadly flat during the quarter.
Key takeaways from the analyst meet
1. On KGD6, management maintained that they will be evaluating the reservoir continuity
through drilling and interconnecting more wells. RIL will be cautious in ramping up (from 60
to 80mmscmd) without carrying full studies as it may cause damage to the ultimate
recoverability of the reserves. It said that these studies could take till mid-FY12 to complete.
While management maintained that the in-place reserves numbers are intact, this could
impact the medium term volume estimates for gas. Our FY12 EPS estimate is based on gas
volumes of 75mmscmd. Shortfall of 10mmscmd could lead to downside of Rs2.4 in EPS i.e.
~3%.
2. The field development plan (FDP) for the satellite fields is expected to be delayed beyond
March 2011 as DGH evaluates possibility to undertake integrated development plan (with
other discoveries in D6) which might reduce development cost. This is despite the fact that
RIL has fast-tracked the pre-development and engineering work. DGH is also subjecting all
new development plans and capex proposals to much more scrutiny.
3. As for NEC-25, RIL management clarified that they are ready to submit the revised FDP
pending few queries from DGH and production can be expected 3-4 years post FDP
approval.
4. RIL consortium plans to drill one exploratory well in KG-D9 in 3QFY11 but are unlikely to drill
any well in MN-D4 as it is not an immediate priority at this stage. Company has two
deepwater rigs at the moment with one more becoming available in Nov’10. We see
potential news flow from D9 drilling as an important trigger (+ve or –ve) as it had
encountered a dry well in 2009. However, no immediate news flow potential from MN-D4 is a
dampener, in our view.
5. The next gas price revision is due in 2014; however, company did confirm that some
customers had volunteered to pay higher gas prices.
6. Company will be undertaking a 20 day shutdown of one of the CDUs in old refinery i.e.
330kbpd.
7. RIL management expects petchem spreads to come off further in 2HFY11as an additional
~12MT capacity (9% of global ethylene capacity) is expected to come on stream in H1CY11.
8. Polyester spreads are, however, expected to remain strong and improve in 3QFY11 given
high prices of cotton, which are at historical highs and currently wide difference vs. PSF.
9. RIL’s standalone net debt remained stable at Rs390bn. The consolidated gross debt (incl.
debt for Infotel) was Rs800-850bn as against the standalone reported gross debt of
Rs682bn.
Recommendation and valuation: We retain our EPS estimates and maintain In-Line as
possible improvement in refining is expected to be counterbalanced by weak polymer margins
over the next six months and potential disappointments in the KG gas ramp-up timing. We
believe much of the E&P upside is already in the price and re-rating will be contingent upon
further visibility on exploration success outside of D6 as well as identification of large-ticket reinvestment
opportunities.
No comments:
Post a Comment