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Reliance Industries (RIL)
Energy
The pressure is on (or off?). Recent press articles on the continued decline in gas
production from RIL’s KG D-6 block raise potential concerns on the supply of gas from
KG D-6 block. We await further clarity on the issue before cutting our production
estimates for KG D-6 block. We retain our REDUCE rating on the stock given potential
downside risks to our estimates from (1) lower-than-expected gas production from KG
D-6 block and (2) non-availability of income tax exemption on gas production.
KG D-6 gas production disappoints in the recent weeks
We are concerned about the recent decline in gas production in KG D-6 block to ~54 mcm/d. Gas
production from the D1 and D3 fields has declined to 45-46 mcm/d versus earlier achieved
production levels of 53-54 mcm/d; MA field is currently producing 8 mcm/d of associated gas.
According to a press article, RIL is facing complexities in the reservoir, which apparently has not
behaved as per expectations. This has led to lower gas production in the recent weeks. We had
raised our concerns on the reservoir behavior in our October 26, 2010 note “Is the pressure fine?”.
Low pressure condition at the reservoir may crimp production
RIL’s recent contract with Mustang Engineering for the design of a gas compression facility to
increase the pressure at KG D-6 onshore terminal raises questions about KG D-6 reservoir behavior
and its production profile. We believe an unexpected decline in the reservoir pressure, if any, may
impact overall production profile of the block. We note that RIL has still not drilled four wells out
of 22 wells approved for phase-I of the field development plan. RIL’s representative at the recent
“Gas in India” conference indicated an increase in KG D-6 gas production to 80 mcm/d in 2011-
12 by connecting more wells to the currently producing wells.
We see meaningful downside risks to our earnings estimates from lower-than-expected gas
production in KG D-6 block. Our FY2012E and FY2013E EPS for RIL will decline to `69 (-4.9%) and
`76 (-9.9%), if gas production is at 60 mcm/d instead of ramping up as per our expectations. We
are modeling a rather benign scenario of KG D-6 gas production increasing to 72 mcm/d in
FY2012E and 88 mcm/d in FY2013E (see Exhibit 1). Also, this would raise issues about availability
of gas in India—KG D-6 block contributes to 30 mcm/d of our incremental supply of 56 mcm/d in
FY2011-13E in India (see Exhibit 2). Our SOTP-based fair valuation for RIL will decline by `38/share,
if gas production from KG D-6 block does not ramp up beyond 60 mcm/d.
Income tax on gas production may further erode earnings
In our forecasts, we assume that RIL will continue to avail of income tax exemption on gas
production from KG D-6 block. However, if the income tax exemption is not available, we
compute RIL’s FY2012E and FY2013E EPS to decline by 9% and 9.8% to `66 and `77.
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