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January 22, 2011
Reliance Industries
F3Q11 Results In-line
Quick Comment: RIL reported F3Q11 results in line
with our expectation. The company reported EBITDA of
Rs~95.5bn up ~22% YoY and 1.6% QoQ. PAT came at
Rs51.4bn up 4.3% sequentially and 28.1% on a YoY
basis. The refining and petrochemical divisions came in
our line with expectation and the E&P division was
negatively affected due to volume slippages. However,
as we expected, improvement in Gross Refining
Margins (GRMs) and Petrochemical netbacks more than
offset the negative impact of decline in E&P business.
No clarity on E&P: RIL produced ~55.8 mmscmd of
gas from the KG-D6 field down 3.5% QoQ. Currently, it
is producing 52-55mmscmd of gas from KG D6 fields of
which 42-45mmscmd is from D1-D3 fields and ~8 from
MA1 field. However, there is no clarity on the time-line of
volumes increasing to 60mmscmd as RIL is still working
with DGH on its plan to increase production. The focus is
to convert the ~10Tcf of 2P reserves to 1P reserves for
production. On this front, RIL is planning to drill more
wells and increase exploration activities in the block.
Overall, EBIT from oil & gas business declined 12%
QoQ however was up ~2% YoY.
Refining EBIT grows by ~11% QoQ. Gross refining
margins (GRMs) stood at US$9/bbl implying a spread of
US$3.5/bbl over Singapore complex. RIL expects GRMs
to further improve from the current levels. We were
positively surprised from throughput of ~16MT despite a
22-day shutdown of one CDU at the refinery, implying
that throughput could have easily be more than 17MT in
normalized refinery operations.
Record quarter for Petrochemicals: EBIT grew by
~11% QoQ to Rs24.3 in-line with our expectations. RIL
is confident of better petrochemical margins; with most
capacity additions already behind us, it expects
incremental supply could be lower than demand growth.
What does this mean to our earnings? Based on
F3Q11 results we maintain our estimates. However, for
the E&P business we highlight that a 5-mmscmd
decrease in gas volumes would lead to ~3.5% decrease
in our earnings
F3Q11 – Results in line
RIL reported F3Q11 results in-line with our expectation. The
company reported EBITDA of Rs~95.5bn up ~22% YoY and
1.6% QoQ. PAT came at Rs51.4bn up 4.3% sequentially and
28.1% on a YoY basis. The refining and petrochemical
divisions came in line with our expectation and the E&P
division was negatively affected due to volume slippages.
However, as we expected, improvement in Gross Refining
Margins (GRMs) and Petrochemical netbacks more than
offset the negative impact of decline in E&P business
No clarity on E&P: RIL produced ~55.8 mmscmd of gas
from the KG-D6 field down 3.5% QoQ. Oil production was
at 23.3kb/d up 3% QoQ. Overall, EBIT from oil & gas
business declined 12% QoQ, however, it rose 2% YoY.
Currently, RIL is producing 52-55mmscmd of gas from KG
D6 fields of which 42-45mmscmd is from D1-D3 fields and
~8 from MA1 field. However, there is no clarity on the
time-line of volumes going back to 60mmscmd, as RIL is
still working with DGH on its plan to increase production.
The focus is to convert the ~10Tcf of 2P reserves to 1P
reserves for production. On this front, RIL is planning to
drill more wells and increase exploration activities in the
block.
RIL’s reservoir team is focusing on maximizing productivity of
the both oil/gas production from KG D6 fields over its life
before they ramp up gas production to 80 mmscmd and oil
production to 40kb/d. However, the timeframe for this exercise
in unknown. We think the ramp-up of gas production to
80mmscmd now seems to be a longer dated issue.
For E&P business we highlight that a 5-mmscmd
decrease in gas volumes would lead to ~3.5%
decrease in our F2012 earnings estimate.
PMT fields has come-out of shut-down and started producing
from 25
th
October 2010. Consequently, oil production from
PMT field was up ~222% QoQ and gas production was up
~24% QoQ.
Update on Exploration Activities:
Currently, two deepwater rigs are under operation for
exploration and appraisal activities. Appraisal programs for all
oil discoveries of CB-10 block were submitted to DGH.
Record quarter for Petrochemical: The company reported
its highest ever performance from this division with EBIT
growing by ~11% QoQ to Rs24.3bn, up 18% on YoY basis.
The volumes in Petrochemical divisions grew by 6% QoQ as
all the plants operated at full capacity.
RIL is confident of better petrochemical margins as it
believes that most of the capacity additions are already
behind us. Also, the new supply from Asia and ME region
has been absorbed much faster than expectation;
consequently it expects incremental supply to be likely
lower than demand growth.
Domestic demand for polyester products grew 10% due to an
increase in non-apparel applications like home furnishing and
technical textiles and automobiles. Also PET demand grew
26% YoY due to increased demand in bottled water and
beverages.
Refining: Gross refining margins (GRMs) stood at US$9/bbl
US$0.2/bbl below our estimates implying a spread of
US$3.5/bbl over Singapore complex. The GRMs were up 6%
QoQ and ~53% YoY.
Despite lower than expected GRMs, EBIT for the division was
10% higher than our expectation and increased ~11% QoQ
and 77% YoY.
Throughput for the company was 16.1mt, down ~5% on QoQ
basis and 3.1% YoY due to the planned shutdown of one train
of CDU for 22 days. Despite this overall utilization rate for the
quarter was 104% compared to our expectation of 93%, which
surprised us positively.
On the refining front, RIL is processing ~70kb/d of cheaper
Mangala crude, which we estimate could contribute to
$0.50/bbl to GRMs.
Other Developments
• RIL and Russian petrochemical company SIBUR has
formed a joint venture for the production of butyl
rubber in India. The JV facility will have an initial
capacity of 100,000 tons of butyl rubber at RIL’s
Jamnagar complex and is expected to be
commissioned by 2013. RIL will have a majority
stake in the JV.
Valuation methodology
Our price target is based on a sum-of-the-parts valuation.
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.7x, which is the average of its global refining
peers. We value the R&M business at Rs310 per share.
2) The petrochemicals business valuation is based on an
average F2012 EV/EBITDA of 8x. We value the Petrochemical
business at Rs283 per share.
3) With the first oil production started and gas production
begun at its KG basin fields, we use a P/CEPS target
multiple-based valuation for RIL’s E&P business. We assign a
target multiple of 8.3x to our average projected cash profits of
US$5.2billion (F2012-16E) for global comps, in line with the
normalized average global multiples for E&P companies for
F2012e. Based on this, we arrive at a fair value of US$43.5
billion, or Rs600 per share, for RIL’s E&P business.
4) We have valued RIL’s investments at F2011e book value
which includes RIL’s investment in telecom business. We also
value RIL’s treasury shares at ~US$6.7bn or Rs92/share.
After deducting F2011e net-debt of Rs145/share, we arrive at
SOTP Value of Rs1252/share.
We see the following key risks to our price target
1) The stock’s historical correlation with the market of 0.85x –
hence a market correction would impact RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to a
seven-year tax holiday, the Ministry of Petroleum recently
published a circular suggesting the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$6.7bn.
4) Potential delays in the execution of the company’s business
plan.
5) A significant oil/gas discovery could lead to increase in
reserve and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets could
lead to downward revision to resource estimates and hence a
negative impact on our price target.
6) A sharp decline in global economic growth that would likely
compress our projected petrochemical and refining estimates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
January 22, 2011
Reliance Industries
F3Q11 Results In-line
Quick Comment: RIL reported F3Q11 results in line
with our expectation. The company reported EBITDA of
Rs~95.5bn up ~22% YoY and 1.6% QoQ. PAT came at
Rs51.4bn up 4.3% sequentially and 28.1% on a YoY
basis. The refining and petrochemical divisions came in
our line with expectation and the E&P division was
negatively affected due to volume slippages. However,
as we expected, improvement in Gross Refining
Margins (GRMs) and Petrochemical netbacks more than
offset the negative impact of decline in E&P business.
No clarity on E&P: RIL produced ~55.8 mmscmd of
gas from the KG-D6 field down 3.5% QoQ. Currently, it
is producing 52-55mmscmd of gas from KG D6 fields of
which 42-45mmscmd is from D1-D3 fields and ~8 from
MA1 field. However, there is no clarity on the time-line of
volumes increasing to 60mmscmd as RIL is still working
with DGH on its plan to increase production. The focus is
to convert the ~10Tcf of 2P reserves to 1P reserves for
production. On this front, RIL is planning to drill more
wells and increase exploration activities in the block.
Overall, EBIT from oil & gas business declined 12%
QoQ however was up ~2% YoY.
margins (GRMs) stood at US$9/bbl implying a spread of
US$3.5/bbl over Singapore complex. RIL expects GRMs
to further improve from the current levels. We were
positively surprised from throughput of ~16MT despite a
22-day shutdown of one CDU at the refinery, implying
that throughput could have easily be more than 17MT in
normalized refinery operations.
Record quarter for Petrochemicals: EBIT grew by
~11% QoQ to Rs24.3 in-line with our expectations. RIL
is confident of better petrochemical margins; with most
capacity additions already behind us, it expects
incremental supply could be lower than demand growth.
What does this mean to our earnings? Based on
F3Q11 results we maintain our estimates. However, for
the E&P business we highlight that a 5-mmscmd
decrease in gas volumes would lead to ~3.5% decrease
in our earnings
F3Q11 – Results in line
RIL reported F3Q11 results in-line with our expectation. The
company reported EBITDA of Rs~95.5bn up ~22% YoY and
1.6% QoQ. PAT came at Rs51.4bn up 4.3% sequentially and
28.1% on a YoY basis. The refining and petrochemical
divisions came in line with our expectation and the E&P
division was negatively affected due to volume slippages.
However, as we expected, improvement in Gross Refining
Margins (GRMs) and Petrochemical netbacks more than
offset the negative impact of decline in E&P business
No clarity on E&P: RIL produced ~55.8 mmscmd of gas
from the KG-D6 field down 3.5% QoQ. Oil production was
at 23.3kb/d up 3% QoQ. Overall, EBIT from oil & gas
business declined 12% QoQ, however, it rose 2% YoY.
Currently, RIL is producing 52-55mmscmd of gas from KG
D6 fields of which 42-45mmscmd is from D1-D3 fields and
~8 from MA1 field. However, there is no clarity on the
time-line of volumes going back to 60mmscmd, as RIL is
still working with DGH on its plan to increase production.
The focus is to convert the ~10Tcf of 2P reserves to 1P
reserves for production. On this front, RIL is planning to
drill more wells and increase exploration activities in the
block.
RIL’s reservoir team is focusing on maximizing productivity of
the both oil/gas production from KG D6 fields over its life
before they ramp up gas production to 80 mmscmd and oil
production to 40kb/d. However, the timeframe for this exercise
in unknown. We think the ramp-up of gas production to
80mmscmd now seems to be a longer dated issue.
For E&P business we highlight that a 5-mmscmd
decrease in gas volumes would lead to ~3.5%
decrease in our F2012 earnings estimate.
PMT fields has come-out of shut-down and started producing
from 25
th
October 2010. Consequently, oil production from
PMT field was up ~222% QoQ and gas production was up
~24% QoQ.
Update on Exploration Activities:
Currently, two deepwater rigs are under operation for
exploration and appraisal activities. Appraisal programs for all
oil discoveries of CB-10 block were submitted to DGH.
Record quarter for Petrochemical: The company reported
its highest ever performance from this division with EBIT
growing by ~11% QoQ to Rs24.3bn, up 18% on YoY basis.
The volumes in Petrochemical divisions grew by 6% QoQ as
all the plants operated at full capacity.
RIL is confident of better petrochemical margins as it
believes that most of the capacity additions are already
behind us. Also, the new supply from Asia and ME region
has been absorbed much faster than expectation;
consequently it expects incremental supply to be likely
lower than demand growth.
Domestic demand for polyester products grew 10% due to an
increase in non-apparel applications like home furnishing and
technical textiles and automobiles. Also PET demand grew
26% YoY due to increased demand in bottled water and
beverages.
Refining: Gross refining margins (GRMs) stood at US$9/bbl
US$0.2/bbl below our estimates implying a spread of
US$3.5/bbl over Singapore complex. The GRMs were up 6%
QoQ and ~53% YoY.
Despite lower than expected GRMs, EBIT for the division was
10% higher than our expectation and increased ~11% QoQ
and 77% YoY.
Throughput for the company was 16.1mt, down ~5% on QoQ
basis and 3.1% YoY due to the planned shutdown of one train
of CDU for 22 days. Despite this overall utilization rate for the
quarter was 104% compared to our expectation of 93%, which
surprised us positively.
On the refining front, RIL is processing ~70kb/d of cheaper
Mangala crude, which we estimate could contribute to
$0.50/bbl to GRMs.
Other Developments
• RIL and Russian petrochemical company SIBUR has
formed a joint venture for the production of butyl
rubber in India. The JV facility will have an initial
capacity of 100,000 tons of butyl rubber at RIL’s
Jamnagar complex and is expected to be
commissioned by 2013. RIL will have a majority
stake in the JV.
Valuation methodology
Our price target is based on a sum-of-the-parts valuation.
1) We value the R&M business on an average F2012e
EV/EBITDA of 6.7x, which is the average of its global refining
peers. We value the R&M business at Rs310 per share.
2) The petrochemicals business valuation is based on an
average F2012 EV/EBITDA of 8x. We value the Petrochemical
business at Rs283 per share.
3) With the first oil production started and gas production
begun at its KG basin fields, we use a P/CEPS target
multiple-based valuation for RIL’s E&P business. We assign a
target multiple of 8.3x to our average projected cash profits of
US$5.2billion (F2012-16E) for global comps, in line with the
normalized average global multiples for E&P companies for
F2012e. Based on this, we arrive at a fair value of US$43.5
billion, or Rs600 per share, for RIL’s E&P business.
4) We have valued RIL’s investments at F2011e book value
which includes RIL’s investment in telecom business. We also
value RIL’s treasury shares at ~US$6.7bn or Rs92/share.
After deducting F2011e net-debt of Rs145/share, we arrive at
SOTP Value of Rs1252/share.
We see the following key risks to our price target
1) The stock’s historical correlation with the market of 0.85x –
hence a market correction would impact RIL.
2) The removal of the tax holiday for the E&P business.
Although Reliance’s product-sharing contract entitles it to a
seven-year tax holiday, the Ministry of Petroleum recently
published a circular suggesting the matter is sub judice.
3) The overhang of Reliance stock held by the company’s
subsidiaries is currently valued at close to US$6.7bn.
4) Potential delays in the execution of the company’s business
plan.
5) A significant oil/gas discovery could lead to increase in
reserve and thus a positive revision to our price target.
Similarly, unfavorable exploration results from assets could
lead to downward revision to resource estimates and hence a
negative impact on our price target.
6) A sharp decline in global economic growth that would likely
compress our projected petrochemical and refining estimates.
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