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Reservoir more complex than anticipated — In its interactions with the DGH and
gov’t (source: indianpetro), RIL has stated that the behaviour of D1-D3 reservoirs in
KG-D6 has seen “substantial variance” (higher pressure decline, water production, etc)
and is the reason for production decline rather than drilling of inadequate wells. While it
was earlier understood that both the “main channel area” (c40% of the 11.3 tcf
reserves) and the areas outside of it (c60% of reserves) were connected to each other
and hence drilling wells in the former would suffice (as envisaged in the original FDP),
it now appears (based on the last two year’s production data) that volumes outside the
main channel are not contributing to production, indicating poor connectivity.
Drilling more wells not an immediate solution — As opposed to the targeted 22
wells per the FDP (by Apr-11), RIL has put 18 wells on production in the main channel
area. DGH has argued that RIL should drill additional wells and connect them to the
existing well system. As per RIL, drilling new wells is difficult as: (1) the area outside
the main channel is dominated by thinly laminated sands for which justifying capex for
independent wells is a key challenge, and (2) drilling additional wells in the main
channel would unlikely lead to either additional recovery or higher production rates.
Commissioning of new wells to take 36-44 months — Identification of new wells
and deciding the next course of action is the key challenge, and RIL has suggested
that a technical committee comprising global experts be put in place. It also expects its
deal with BP to help it in this endeavour. Once new drilling locations are decided by RIL
and approved by the DGH, commissioning of new wells will likely take 36-44 months
from the zero date as long-lead items need to be ordered, pre-commissioning activities
need to be completed, and the fair weather window needs to be taken into account.
The delay is a negative and implies a longer wait for the ramp up.
Expects production at c46-47 mmscmd in FY13 — RIL has indicated that gas sales
from D1-D3 could drop to c38 mmscmd in FY13 (c41 currently), subject to success of
workover jobs in FY12 (in c6 wells to address the issue of high water production). MA
gas sales are projected at 9 mmscmd, resulting in total production of ~46-47 mmscmd.
E&P could continue to drive near-term stock sentiment — The further decline likely
in KG production combined with the likely delay in ramp up is a negative. While nearterm earnings may be supported if the strength in refining margins sustains, stock
sentiment could continue to be driven by developments on the E&P front.
Reliance Industries
Valuation
Our Rs1,120 target price is based on an average of a sum-of-the-parts value
(Rs1,071/sh) and P/E value (Rs1,109/sh) and explicitly adds NPV of the shale gas JVs
of Rs30/sh. Our SOTP is derived by: 1) Valuing RIL's core petchem and downstream
oil business on an EV/EBITDA of 7.0x FY12E; 2) Valuing total E&P assets including oil
& gas prospects and other blocks at Rs380/sh based on 10x FY12E EV/EBITDA; 3)
Valuing investments in the organized retail business, SEZ, etc. at Rs37/share, based
on book value of investments so far; and 4) Valuing treasury stock (post stock sale) at
target price. For the P/E valuation, we ascribe a 14x FY12E multiple, in line with the
market multiple. We believe ramp up of the new refinery and KG gas production will
lead to the market focusing on FY12 earnings (which capture the impact of both),
prompting us to give equal weightage to a multiple-based methodology and a sum-ofthe-parts based value while deducing our target price.
Risks
We rate RIL Low Risk, in line with the rating suggested by our quantitative risk-rating
system, as commencement of the new refinery and KG gas production limit execution
risks. Besides, with the core petrochemicals and refining businesses gaining
momentum, we believe that risks on slower KG ramp-up stand mitigated. Downside
risks that could prevent the shares from reaching our target price include: RIL's
margins are exposed to the global petrochemical and refining cycles; further delays in
the ramp-up of production of KG-D6 gas; delays in the drilling programme and/or
negative news-flow for the new blocks (D9, D3, MN-D4).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reservoir more complex than anticipated — In its interactions with the DGH and
gov’t (source: indianpetro), RIL has stated that the behaviour of D1-D3 reservoirs in
KG-D6 has seen “substantial variance” (higher pressure decline, water production, etc)
and is the reason for production decline rather than drilling of inadequate wells. While it
was earlier understood that both the “main channel area” (c40% of the 11.3 tcf
reserves) and the areas outside of it (c60% of reserves) were connected to each other
and hence drilling wells in the former would suffice (as envisaged in the original FDP),
it now appears (based on the last two year’s production data) that volumes outside the
main channel are not contributing to production, indicating poor connectivity.
Drilling more wells not an immediate solution — As opposed to the targeted 22
wells per the FDP (by Apr-11), RIL has put 18 wells on production in the main channel
area. DGH has argued that RIL should drill additional wells and connect them to the
existing well system. As per RIL, drilling new wells is difficult as: (1) the area outside
the main channel is dominated by thinly laminated sands for which justifying capex for
independent wells is a key challenge, and (2) drilling additional wells in the main
channel would unlikely lead to either additional recovery or higher production rates.
Commissioning of new wells to take 36-44 months — Identification of new wells
and deciding the next course of action is the key challenge, and RIL has suggested
that a technical committee comprising global experts be put in place. It also expects its
deal with BP to help it in this endeavour. Once new drilling locations are decided by RIL
and approved by the DGH, commissioning of new wells will likely take 36-44 months
from the zero date as long-lead items need to be ordered, pre-commissioning activities
need to be completed, and the fair weather window needs to be taken into account.
The delay is a negative and implies a longer wait for the ramp up.
Expects production at c46-47 mmscmd in FY13 — RIL has indicated that gas sales
from D1-D3 could drop to c38 mmscmd in FY13 (c41 currently), subject to success of
workover jobs in FY12 (in c6 wells to address the issue of high water production). MA
gas sales are projected at 9 mmscmd, resulting in total production of ~46-47 mmscmd.
E&P could continue to drive near-term stock sentiment — The further decline likely
in KG production combined with the likely delay in ramp up is a negative. While nearterm earnings may be supported if the strength in refining margins sustains, stock
sentiment could continue to be driven by developments on the E&P front.
Reliance Industries
Valuation
Our Rs1,120 target price is based on an average of a sum-of-the-parts value
(Rs1,071/sh) and P/E value (Rs1,109/sh) and explicitly adds NPV of the shale gas JVs
of Rs30/sh. Our SOTP is derived by: 1) Valuing RIL's core petchem and downstream
oil business on an EV/EBITDA of 7.0x FY12E; 2) Valuing total E&P assets including oil
& gas prospects and other blocks at Rs380/sh based on 10x FY12E EV/EBITDA; 3)
Valuing investments in the organized retail business, SEZ, etc. at Rs37/share, based
on book value of investments so far; and 4) Valuing treasury stock (post stock sale) at
target price. For the P/E valuation, we ascribe a 14x FY12E multiple, in line with the
market multiple. We believe ramp up of the new refinery and KG gas production will
lead to the market focusing on FY12 earnings (which capture the impact of both),
prompting us to give equal weightage to a multiple-based methodology and a sum-ofthe-parts based value while deducing our target price.
Risks
We rate RIL Low Risk, in line with the rating suggested by our quantitative risk-rating
system, as commencement of the new refinery and KG gas production limit execution
risks. Besides, with the core petrochemicals and refining businesses gaining
momentum, we believe that risks on slower KG ramp-up stand mitigated. Downside
risks that could prevent the shares from reaching our target price include: RIL's
margins are exposed to the global petrochemical and refining cycles; further delays in
the ramp-up of production of KG-D6 gas; delays in the drilling programme and/or
negative news-flow for the new blocks (D9, D3, MN-D4).
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