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With 30TCF (5bn boe) of undeveloped reserves exploration potential and a sizeable undeveloped resource base we maintain our outperform rating on Reliance with a target prices of INR1250.
Highlights
Despite the enormous gas potential off the east coast of India, low gas pricing has limited investment. A decade on from government efforts to encourage E&P in India, production at Dhirubhai has stalled and
gas production in India is now declining. We believe that regulatory reforms which raise pricing and
promote investment are inevitable. This will be the catalyst for the next wave of growth for Reliance.
Ramp up of gas at Reliance's flagship Dhirubhai project has stalled – but only temporarily.
Problems appear to be part technical and part commercial. Reservoir uncertainties have resulted in
production stalling at 50-55 MCM/d which is lower than planned. Although additional wells will be
brought on line over the next 6 months, we expect production to remain range bound between 50 -
60MCM/d throughout 2011/12.
Continued ramp up of Dhirubhai to target levels will depend on gas pricing. While Reliance will
complete its 22 well commitment program, additional wells will be required to reach target rates of
80MCM/d. While the original development plan envisioned drilling of 50 wells in total, Reliance may
wait for clarification on gas pricing before drilling additional wells.
The logic for higher gas prices is compelling. As Dhirubhai and Indian gas production has declined,
imports of higher priced oil and LNG are increasing. With oil reaching triple digits and LNG above
$10/mscf it makes sense for India to increase gas prices to stimulate the development of domestic gas
production.
Increased gas pricing will not only stimulate Dhirubhai production, but will also unlock the next
wave of offshore gas developments. Reliance has made 39 discoveries offshore India, but only 2 have
been developed. 30TCF of discovered but undeveloped gas remains in D6 and NEC25 awaiting
development pending agreement on gas pricing. Greater flexibility on gas pricing will be the catalyst for
the next wave of gas developments (D6 satellites, NEC-25)
Exploration off India's east coast continues to look attractive. Reliance has explored 7 of their 22
offshore blocks encompassing an area half the size of the North Sea. Discoveries have been made in
almost every block, with D6 the most prolific to date with estimated resources of 50TCF. The total
resource base could be over 200TCF. MN-D4 continues to hold significant attraction and we expect
drilling by the end of 2011/12.
While upstream growth has faltered, downstream business segments are performing strongly and
underpin current valuations. Refining margins have rebounded to $9/bbl as light-heavy spreads have
widened on the back of higher oil prices and the petrochemicals segment is also experiencing high
demand and volume growth. At current valuations there is little downside but also very little being priced
in for future growth.
Investment Conclusion
Reliance has underperformed the benchmark Sensex index over the past year with good reason. Dhirubhai
is turning out to be more complex than anticipated and the visibility on future gas growth has evaporated.
At $4.20/mscf ($25/boe) incremental investment in Dhirubhai is marginal and it is simply uneconomic to
develop deep water offshore gas fields. While the story could get worse before it gets better the valuation of
Reliance is strongly underpinned by its current asset base.
There remains significant gas potential off India's east coast. The upside for investors will come from
greater flexibility from the government on gas pricing which will encourage investment. While the timing
of this is uncertain, it is in our view inevitable given the cost of alternative fuels (LNG, fuel oil and diesel).
We think that investors should get ahead of the regulatory curve and take advantage of attractive valuations.
With 30TCF (5bn boe) of undeveloped reserves exploration potential and a sizeable undeveloped resource base we maintain our outperform rating on Reliance with a target prices of INR1250.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
With 30TCF (5bn boe) of undeveloped reserves exploration potential and a sizeable undeveloped resource base we maintain our outperform rating on Reliance with a target prices of INR1250.
Despite the enormous gas potential off the east coast of India, low gas pricing has limited investment. A decade on from government efforts to encourage E&P in India, production at Dhirubhai has stalled and
gas production in India is now declining. We believe that regulatory reforms which raise pricing and
promote investment are inevitable. This will be the catalyst for the next wave of growth for Reliance.
Ramp up of gas at Reliance's flagship Dhirubhai project has stalled – but only temporarily.
Problems appear to be part technical and part commercial. Reservoir uncertainties have resulted in
production stalling at 50-55 MCM/d which is lower than planned. Although additional wells will be
brought on line over the next 6 months, we expect production to remain range bound between 50 -
60MCM/d throughout 2011/12.
Continued ramp up of Dhirubhai to target levels will depend on gas pricing. While Reliance will
complete its 22 well commitment program, additional wells will be required to reach target rates of
80MCM/d. While the original development plan envisioned drilling of 50 wells in total, Reliance may
wait for clarification on gas pricing before drilling additional wells.
The logic for higher gas prices is compelling. As Dhirubhai and Indian gas production has declined,
imports of higher priced oil and LNG are increasing. With oil reaching triple digits and LNG above
$10/mscf it makes sense for India to increase gas prices to stimulate the development of domestic gas
production.
Increased gas pricing will not only stimulate Dhirubhai production, but will also unlock the next
wave of offshore gas developments. Reliance has made 39 discoveries offshore India, but only 2 have
been developed. 30TCF of discovered but undeveloped gas remains in D6 and NEC25 awaiting
development pending agreement on gas pricing. Greater flexibility on gas pricing will be the catalyst for
the next wave of gas developments (D6 satellites, NEC-25)
offshore blocks encompassing an area half the size of the North Sea. Discoveries have been made in
almost every block, with D6 the most prolific to date with estimated resources of 50TCF. The total
resource base could be over 200TCF. MN-D4 continues to hold significant attraction and we expect
drilling by the end of 2011/12.
While upstream growth has faltered, downstream business segments are performing strongly and
underpin current valuations. Refining margins have rebounded to $9/bbl as light-heavy spreads have
widened on the back of higher oil prices and the petrochemicals segment is also experiencing high
demand and volume growth. At current valuations there is little downside but also very little being priced
in for future growth.
Investment Conclusion
Reliance has underperformed the benchmark Sensex index over the past year with good reason. Dhirubhai
is turning out to be more complex than anticipated and the visibility on future gas growth has evaporated.
At $4.20/mscf ($25/boe) incremental investment in Dhirubhai is marginal and it is simply uneconomic to
develop deep water offshore gas fields. While the story could get worse before it gets better the valuation of
Reliance is strongly underpinned by its current asset base.
There remains significant gas potential off India's east coast. The upside for investors will come from
greater flexibility from the government on gas pricing which will encourage investment. While the timing
of this is uncertain, it is in our view inevitable given the cost of alternative fuels (LNG, fuel oil and diesel).
We think that investors should get ahead of the regulatory curve and take advantage of attractive valuations.
With 30TCF (5bn boe) of undeveloped reserves exploration potential and a sizeable undeveloped resource base we maintain our outperform rating on Reliance with a target prices of INR1250.
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