Reliance Industries (RIL IN, INR 719, Buy)
Niko Resources announced a 5.3 tcf cut in reserves primarily attributed to KG-D6. Niko includes only fields with FDP approval in reserves. Thus, it includes only D1/D3 main channel and MA field of KG-D6 as part of 2P reserves. Other discoveries in KG-D6 (R-Series and 7 satellites), are in 2C resources. We now estimate KG-D6 to have 2P reserves of 3.0 tcf and 2C resources of 2.4 tcf. Niko anticipates no further drilling in D1/D3. The plan is to submit Integrated Plan for R-Series and 7 satellites, and production from this is likely from FY15. The cut in reserves has surprised us negatively. We estimate most of the cut to be in laminated portion of D1/D3, and will have an impact on NPV of INR17/share. Maintain ‘BUY’.
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Niko’s reserves data includes only fields with FDP approval
Niko includes only fields with FDP approval in 2P reserves – D1/D3 main channel and MA fields of KG-D6. 2C resources include fields without FDP approval – (a) R-Series and 7 satellites in KG-D6 and (b) NEC-25. While GoI recently approved OFDP for 4 of these 7 satellites, the JV plans to submit an integrated plan to for R-Series and the 7 satellites together. Thus, even the 4 satellites with OFDP approval are not in Niko’s 2P reserves.
Explaining the cut in reserves – Cut in laminated portion of D1/D3
Niko has cut reserves by 5.3 tcf. We attribute most of this cut to laminated portion of D1/D3 fields of KG-D6, probably due to lack of connectivity. The main channel of D1/D3 and MA field had 2P reserves of 4.7 tcf initially and is left with ~3.0 tcf post production of ~1.7 tcf. Niko anticipates no further drilling in D1/D3 portion to recover 2P reserves. Thus, production from D1D3 and MA will continue to decline.KG-D6 has gross 2P of 3.0 tcf and gross 2C of 2.4 tcf. From BP’s 1P data, we estimate gross 1P of 1.6 tcf. NEC-25 has 2C reserves of 1.0 tcf. Thus, RIL has total reserves of 6.4 tcf.
Outlook and valuation: R-Series and Satellites hold key; ‘BUY’.
Post approval of integrated plan, production from R-Series and 7 satellites will start in FY15. However, as per Niko, this needs a higher gas price. We had estimated KG-D6 to hold 2P reserves of 6.9 tcf. Niko’s cut implies KG-D6 2P+2C reserves of 5.4 tcf. This difference of ~1.5 tcf will lower KG-D6 NPV by INR 17. We will revisit our numbers after Niko releases its reserves data next week. Maintain ‘BUY’ with a fair value of INR 1,006.
Regards,
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