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Concerns overdone
Reliance is down 20% over the last ten weeks weighed down, in part, by the draft
CAG report. In their replies, the DGH has defended most of its policy decisions
while Reliance has strongly argued against specific contractual irregularities raised
in the report. While still uncertain, a milder final report by CAG over the coming
weeks could pave the way for a stock price rebound. Even otherwise, downside
should be limited from current levels; the stock trading within ~5% of a valuation
scenario that assumes an unlikely repeat of 2008-9 macro. We have reduced our
target to Rs960/sh to factor in lower downstream multiples but maintain BUY.
DGH has defended its policy decisions. In its reply to CAG’s draft report, India’s
upstream regulator DGH stoutly defended its policy decisions related to Reliance’s KGD6
block. On the contentious issue of non-relinquishment of parts of KG-D6, for
example, it stated that the entire block had been covered by 2D- and a large part by
3D-seismic surveys which raised the potential of continuous hydrocarbon presence
warranting more evaluation. It also emphasized that capex estimates change as midcourse
revision of development plans are a necessary and established practice. DGH
also underlined that the revised capex had been favourably reviewed by independent
consultants and indicated that cost recoveries are based on audits and not approvals.
Reliance argues strongly on CAG’s objections too. In this context, it asked
Reliance to reply on 25 specific instances raised by CAG related to tender
inconsistencies. These aggregate to US$620mn capex for D1-D3 fields but as Reliance
highlights, ~40% of this rise is related to hindsight comparison of rig rates. Reliance
has also given reasons for most other instances highlighting that its tender processes
adhered to guidelines approved by the management committee. Reliance also
highlighted that KG-D6 development costs compared extremely favourably to other
large deepwater projects of global majors and even shallow-water Indian projects.
Low E&P expectations. In any case, the US$620m capex at risk is just 10% of D1-
D3 spend so far; any disallowance has limited impact, therefore. Even relinquishments
of parts of KG-D6 is not disastrous; we ascribe only Rs4/sh as exploration upside here.
In this context, the 20% stock price correction in the last ten weeks (which has taken
implied E&P value to five year lows) is overdone. Any wider legal investigations aside,
a milder final report by CAG within the coming weeks should be stock price trigger.
Maintain BUY. Even otherwise, downside should be limited; the stock trading within
~5% of a valuation scenario (Rs705/sh) that assumes an unlikely repeat of 2008-9
macro (US$6.7/bbl GRMs cf. 1QFY12 at US$10.3/bbl, +US$100/tonne cut to petchem
margins cf. 1QFY12). Here we have also pegged E&P value to that implied by the
US$7.2bn BP deal (ignoring US$1.8bn upside) while ascribing a 0.4x PB to Reliance’s
strategic investment portfolio. We are cutting our target by 10% to Rs960/sh to factor
in lower downstream peer multiples but this still implies a +25% upside. Maintain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Concerns overdone
Reliance is down 20% over the last ten weeks weighed down, in part, by the draft
CAG report. In their replies, the DGH has defended most of its policy decisions
while Reliance has strongly argued against specific contractual irregularities raised
in the report. While still uncertain, a milder final report by CAG over the coming
weeks could pave the way for a stock price rebound. Even otherwise, downside
should be limited from current levels; the stock trading within ~5% of a valuation
scenario that assumes an unlikely repeat of 2008-9 macro. We have reduced our
target to Rs960/sh to factor in lower downstream multiples but maintain BUY.
DGH has defended its policy decisions. In its reply to CAG’s draft report, India’s
upstream regulator DGH stoutly defended its policy decisions related to Reliance’s KGD6
block. On the contentious issue of non-relinquishment of parts of KG-D6, for
example, it stated that the entire block had been covered by 2D- and a large part by
3D-seismic surveys which raised the potential of continuous hydrocarbon presence
warranting more evaluation. It also emphasized that capex estimates change as midcourse
revision of development plans are a necessary and established practice. DGH
also underlined that the revised capex had been favourably reviewed by independent
consultants and indicated that cost recoveries are based on audits and not approvals.
Reliance argues strongly on CAG’s objections too. In this context, it asked
Reliance to reply on 25 specific instances raised by CAG related to tender
inconsistencies. These aggregate to US$620mn capex for D1-D3 fields but as Reliance
highlights, ~40% of this rise is related to hindsight comparison of rig rates. Reliance
has also given reasons for most other instances highlighting that its tender processes
adhered to guidelines approved by the management committee. Reliance also
highlighted that KG-D6 development costs compared extremely favourably to other
large deepwater projects of global majors and even shallow-water Indian projects.
Low E&P expectations. In any case, the US$620m capex at risk is just 10% of D1-
D3 spend so far; any disallowance has limited impact, therefore. Even relinquishments
of parts of KG-D6 is not disastrous; we ascribe only Rs4/sh as exploration upside here.
In this context, the 20% stock price correction in the last ten weeks (which has taken
implied E&P value to five year lows) is overdone. Any wider legal investigations aside,
a milder final report by CAG within the coming weeks should be stock price trigger.
Maintain BUY. Even otherwise, downside should be limited; the stock trading within
~5% of a valuation scenario (Rs705/sh) that assumes an unlikely repeat of 2008-9
macro (US$6.7/bbl GRMs cf. 1QFY12 at US$10.3/bbl, +US$100/tonne cut to petchem
margins cf. 1QFY12). Here we have also pegged E&P value to that implied by the
US$7.2bn BP deal (ignoring US$1.8bn upside) while ascribing a 0.4x PB to Reliance’s
strategic investment portfolio. We are cutting our target by 10% to Rs960/sh to factor
in lower downstream peer multiples but this still implies a +25% upside. Maintain BUY.
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