Reliance Industries - Gas prices hiked, positive for share price sentiment -JPMorgan

The CCEA approved a change in the gas pricing mechanism in the country
– moving to a formula linked to LNG import prices and global
benchmarks. This marks a significant turn from the earlier regime of fixed
pricing, and could incentivize additional exploration/investment. For RIL,
a full resumption of E&P activity at the D6 field, along with a higher price
making reserves economically viable, would be a positive catalyst.

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 Gas prices on the road to de-regulation: The government has shifted
gas pricing from the present fixed price regime to a market linked
formula that takes into account the well head cost of Indian LT LNG
contracts, along with a weighted average of Henry Hub, NBP and Japan
LNG prices. The price will be reset every quarter, and the formula is
valid for 5 years, after which a fully market determined price is
envisaged. As a result, while the formula currently indicates a price of
~$6.77/mmbtu, it is expected to rise to $8-$8.4/mmbtu by next year,
once PLNG's LT contracts are re-priced. Currently we are assuming
$6.8/mmbtu for FY15 and onwards.
 Positive for RIL E&P: This is a positive development for RIL – while
near-term earnings impact is likely to be moderate (EPS higher by
~4%/6% in FY15E/16E), we expect this to have a positive sentiment
impact on the stock. A more remunerative pricing regime is likely to
incentivize increased E&P activity, while potentially adding reserves
which are now economically viable. As such, we expect the stock
reaction to continue to remain positive.
 Prelude to higher production? A key determinant of the extent of
impact on earnings is the potential hike in reserves/peak production rate
– we currently forecast a peak output rate of 60 mmscmd in FY18 – a
higher peak rate, or a longer plateau could add materially to stock
valuations. We note that Niko Resources recently increased its reserves
estimates, and RIL could follow suit.