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Reliance Industries (RIL)
Energy
Gas production disappointment. According to a press release by Niko Resources
dated February 11, 2011, KG D-6 gas production will stay at current production levels
in FY2012E. Niko has received the communication from RIL and the new production
estimate has been sent to the Directorate General of Hydrocarbons. We have cut
FY2012E and FY2013E KG D-6 gas production to 52 mcm/d and 65 mcm/d and our EPS
to `68.6 (-2.3%) and `74.4 (-2.7%). We retain our REDUCE rating.
Niko says FY2012E KG D-6 gas production to stay at current production levels
We reproduce Niko’s (RIL’s 10% partner in KG D-6 block) press release—“Niko Resources Ltd.
(“Niko”) (TSX: NKO) has now received the operator’s volume forecast for the fiscal year ended
March 31, 2012. The forecast predicts that volumes during the period will remain flat at current
production levels. The forecast has been approved by Niko and the operator and has been
forwarded to the Director General of Hydrocarbons.”
Reduced KG D-6 gas production and EPS
We have reduced FY2012E and FY2013E KG D-6 gas production to 52 mcm/d and 65 mcm/d
versus 60 mcm/d and 75 mcm/d previously. However, we have little faith in our estimates noting
limited communication from the company on the nature and extent of production issues at the KG
D-6 block. The impact on DCF is quite limited (`5) since we have only marginally reduced eventual
gas production from KG D-6 block; we may be optimistic about eventual recovery.
KG D-6 gas production and continued delay in other blocks will create uncertainty about valuation
of other blocks
We highlight that (1) KG D-6 block contributes `164 and (2) other blocks (NEC-25, CBM, KG D-3,
KG D-9 and MN D-4 block) `129 to our SOTP-based fair valuation of `990 (see Exhibit 1; `1,000
previously). We have modeled eventual gas production of 17.1 tcf from the KG D-6 block, which
may be at risk if production problems persist. Also, continued delay in E&P activity in other blocks
(see Exhibits 2 and 3) may result in the Street discounting analysts’ estimates of RIL’s E&P business
(with a wide range of estimates) in SOTP valuations.
Retain REDUCE rating despite 9% potential upside to our target price; risks exist
We see more value in other large-cap. stocks in the energy sector and in other sectors and thus,
retain our REDUCE rating on RIL relative to the BSE-30 Index (the benchmark in our rating system).
Also, we see downside risks to our earning assumptions, particularly in the chemical and E&P
segments. (1) Unfavorable tax resolution for KG D-6 gas block and (2) likely implementation of
IFRS from April 1, 2011 pose additional earnings risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
Gas production disappointment. According to a press release by Niko Resources
dated February 11, 2011, KG D-6 gas production will stay at current production levels
in FY2012E. Niko has received the communication from RIL and the new production
estimate has been sent to the Directorate General of Hydrocarbons. We have cut
FY2012E and FY2013E KG D-6 gas production to 52 mcm/d and 65 mcm/d and our EPS
to `68.6 (-2.3%) and `74.4 (-2.7%). We retain our REDUCE rating.
Niko says FY2012E KG D-6 gas production to stay at current production levels
We reproduce Niko’s (RIL’s 10% partner in KG D-6 block) press release—“Niko Resources Ltd.
(“Niko”) (TSX: NKO) has now received the operator’s volume forecast for the fiscal year ended
March 31, 2012. The forecast predicts that volumes during the period will remain flat at current
production levels. The forecast has been approved by Niko and the operator and has been
forwarded to the Director General of Hydrocarbons.”
Reduced KG D-6 gas production and EPS
We have reduced FY2012E and FY2013E KG D-6 gas production to 52 mcm/d and 65 mcm/d
versus 60 mcm/d and 75 mcm/d previously. However, we have little faith in our estimates noting
limited communication from the company on the nature and extent of production issues at the KG
D-6 block. The impact on DCF is quite limited (`5) since we have only marginally reduced eventual
gas production from KG D-6 block; we may be optimistic about eventual recovery.
KG D-6 gas production and continued delay in other blocks will create uncertainty about valuation
of other blocks
We highlight that (1) KG D-6 block contributes `164 and (2) other blocks (NEC-25, CBM, KG D-3,
KG D-9 and MN D-4 block) `129 to our SOTP-based fair valuation of `990 (see Exhibit 1; `1,000
previously). We have modeled eventual gas production of 17.1 tcf from the KG D-6 block, which
may be at risk if production problems persist. Also, continued delay in E&P activity in other blocks
(see Exhibits 2 and 3) may result in the Street discounting analysts’ estimates of RIL’s E&P business
(with a wide range of estimates) in SOTP valuations.
Retain REDUCE rating despite 9% potential upside to our target price; risks exist
We see more value in other large-cap. stocks in the energy sector and in other sectors and thus,
retain our REDUCE rating on RIL relative to the BSE-30 Index (the benchmark in our rating system).
Also, we see downside risks to our earning assumptions, particularly in the chemical and E&P
segments. (1) Unfavorable tax resolution for KG D-6 gas block and (2) likely implementation of
IFRS from April 1, 2011 pose additional earnings risks.
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