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Niko announced today that it was revising the geological model for KG‐D6
and anticipates a drop in reserves from D1/D3 fields. Niko earlier estimated
gross proved reserves (including undeveloped) at 6.75 tcf (as of Mar 2011).
Implied gross proved reserves at 1.5 tcf as per BP
Niko’s announcement follows BP Plc’s reserve estimate in its 2011 annual report from
which we estimate the implied KG‐D6 gross proved reserves at 1.5 tcf (Dec 2011). RIL’s
implied gross proved reserves as on Dec 2011 (again our estimate based on Mar 2011
Annual Report and 9mFY12 production) in KG‐D6 stands at 6.2 tcf. While we believe
that there are differences as BP is more conservative considering that it has assumed a
gas price of USD4.12/mmbtu compared to Niko’s estimate of USD8.66/mmbtu, the
difference is large enough to explain the difference in reserve estimates of 4.7 tcf.
Worst scenario of 4.7 tcf cut in reserves to trim INR 75/share from SOTP
While Niko has not indicated the quantum of cut in reserves, the difference in
estimates of 4.7 tcf leaves us guessing on the possible range of cut in reserves. We have
been maintaining our fair value for RIL (based on BP Plc valuations) considering that BP
knows more about the block given its expertise and access to data. Moreover, BP Plc in
its Q4CY11 analyst call said it always knew that KG‐D6 production was in a decline
phase. However, we are surprised at the lower reserve estimate by BP and cut in
reserves by Niko, as this scenario increases prospects that BP may have paid more for
exploration upsides which would be known only when the actual drilling takes place
(probably in the next two years). Our interaction with the BP Plc management also
indicated that BP “did not just pay for the proved reserves and does feel that there is
much unproved resource potential in the blocks it now has access to”.
We estimate the impact on fair value because of a 1.0 tcf cut in gross reserves for the
KG‐D6 block in two ways:
• Our DCF analysis leads to a cut in NPV by INR23bn or INR7/share per 1.0 tcf cut
• Assuming BP’s purchase value of USD5.2bn for ~10 tcf KG‐D6 reserves (including
undeveloped satellite fields), it implies a reduction in RIL’s NPV by INR52bn
(USD5.2bn/30% BP stake / 10 tcf reserves * 50 USD/INR * 60% RIL stake). This
equals INR15.9/share per 1.0 tcf cut in gross reserves.
The worst case impact on RIL is that its SOTP may be cut by INR75/share (2nd case).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Niko announced today that it was revising the geological model for KG‐D6
and anticipates a drop in reserves from D1/D3 fields. Niko earlier estimated
gross proved reserves (including undeveloped) at 6.75 tcf (as of Mar 2011).
Implied gross proved reserves at 1.5 tcf as per BP
Niko’s announcement follows BP Plc’s reserve estimate in its 2011 annual report from
which we estimate the implied KG‐D6 gross proved reserves at 1.5 tcf (Dec 2011). RIL’s
implied gross proved reserves as on Dec 2011 (again our estimate based on Mar 2011
Annual Report and 9mFY12 production) in KG‐D6 stands at 6.2 tcf. While we believe
that there are differences as BP is more conservative considering that it has assumed a
gas price of USD4.12/mmbtu compared to Niko’s estimate of USD8.66/mmbtu, the
difference is large enough to explain the difference in reserve estimates of 4.7 tcf.
Worst scenario of 4.7 tcf cut in reserves to trim INR 75/share from SOTP
While Niko has not indicated the quantum of cut in reserves, the difference in
estimates of 4.7 tcf leaves us guessing on the possible range of cut in reserves. We have
been maintaining our fair value for RIL (based on BP Plc valuations) considering that BP
knows more about the block given its expertise and access to data. Moreover, BP Plc in
its Q4CY11 analyst call said it always knew that KG‐D6 production was in a decline
phase. However, we are surprised at the lower reserve estimate by BP and cut in
reserves by Niko, as this scenario increases prospects that BP may have paid more for
exploration upsides which would be known only when the actual drilling takes place
(probably in the next two years). Our interaction with the BP Plc management also
indicated that BP “did not just pay for the proved reserves and does feel that there is
much unproved resource potential in the blocks it now has access to”.
We estimate the impact on fair value because of a 1.0 tcf cut in gross reserves for the
KG‐D6 block in two ways:
• Our DCF analysis leads to a cut in NPV by INR23bn or INR7/share per 1.0 tcf cut
• Assuming BP’s purchase value of USD5.2bn for ~10 tcf KG‐D6 reserves (including
undeveloped satellite fields), it implies a reduction in RIL’s NPV by INR52bn
(USD5.2bn/30% BP stake / 10 tcf reserves * 50 USD/INR * 60% RIL stake). This
equals INR15.9/share per 1.0 tcf cut in gross reserves.
The worst case impact on RIL is that its SOTP may be cut by INR75/share (2nd case).
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