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RIL--------------------------------------------------------------------------------- Maintain OUTPERFORM
New report: Time for a counsellor
● At the recent post-results analyst meet, RIL talked of its ongoing
discussions with the Directorate General of Hydrocarbons (DGH)
on several issues related to its E&P activities in India. The
Economic Times, in a recent article, spoke of RIL running into red
tape even on routine matters. We highlight some of the key issues
that were reported over last few quarters.
● Among other things, the DGH has differed on capital budgets,
disallowed recovery of wells/other costs, asked for relinquishment
of a block (due to delay), differed with RIL on drilling objectives,
asked for additional compensation for blocks relinquished earlier
and objected to RIL vendor selection.
● The complex and diverse nature of ‘issues’ may take some time to
resolve. If resolution is made a pre-condition to future E&P
investments, then investment rates could slow in the near term
and could have some risk on the exploration upside (Rs86 in our
SOTP valuation).
● Given the cost recovery PSC model, lower near-term production
has a smaller impact on NAV than on EPS. Marking to market,
current E&P/petchem rates would mean RIL’s FY12E EPS falls
10%, while NAV would fall only 2.5%. Maintain OUTPERFORM.
At the recent post-results analyst meet, RIL spoke of ongoing
discussions with the Directorate General of Hydrocarbons on multiple
issues related to several of its E&P blocks in India, and stated that it
was unable to comment on developments in the E&P business while
these discussions were going on. This is a change from the previous
quarter, when RIL did provide some comment on blocks (outside KG
D6). The Economic Times reported on Monday, 24 January 2011, that
RIL has written to the Secretary, Ministry of Petroleum, pointing out
difficulties and delays it now faces in even ‘routine matters’.
A broad spectrum of issues
The issues raised by the Directorate General of Hydrocarbons are not
limited to any particular block but includes several blocks operated by
RIL (blocks in KG basin, NEC, Cauvery basin, Cambay etc) pointing
to the generic nature of it. Among other things, the Directorate
General of Hydrocarbons has differed on capital budgets, disallowed
recovery of wells/other costs, asked for relinquishment of a block (due
to delay), differed with RIL on drilling objectives, asked for additional
compensation for blocks relinquished earlier and objected to RIL
vendor selection. Please refer to our detailed report, ‘Time for a
counsellor,’ published on 31 January 2011 for block-wise details of the
issues in the recent past.
The oil and gas business is governed by detailed regulation and
production sharing contracts. The DGH is required to ensure rules are
followed and being a government agency, is likely to exercise very
little discretion. RIL may, in turn, find that DGH rules do not allow
optimisation of its E&P objectives
Slow near term E&P activity?
The diverse and complex nature of RIL’s E&P ‘issues’ suggests they
may take time to resolve. If resolution is made a pre condition to
further E&P investments, then investment rates could slow in the near
term. We have Rs86 in our base-case RIL NAV for value of RIL’s E&P
upside, which can be at some risk. Additionally, with RIL worrying
about/waiting for the DGH, fixing current production issues at D6
could take longer than normal.
Our base-case NAV of Rs1,183 for RIL includes Rs258 for KG D6,
and Rs98 for other E&P fields. Given the cost recovery PSC model,
lower near-term production has a smaller impact on NAV than on
EPS. Marking to market, current E&P/petchem rates would mean
RIL’s FY12E EPS falls 10%, while NAV would fall only 2.5%. We
maintain our OUTPERFORM rating.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
RIL--------------------------------------------------------------------------------- Maintain OUTPERFORM
New report: Time for a counsellor
● At the recent post-results analyst meet, RIL talked of its ongoing
discussions with the Directorate General of Hydrocarbons (DGH)
on several issues related to its E&P activities in India. The
Economic Times, in a recent article, spoke of RIL running into red
tape even on routine matters. We highlight some of the key issues
that were reported over last few quarters.
● Among other things, the DGH has differed on capital budgets,
disallowed recovery of wells/other costs, asked for relinquishment
of a block (due to delay), differed with RIL on drilling objectives,
asked for additional compensation for blocks relinquished earlier
and objected to RIL vendor selection.
● The complex and diverse nature of ‘issues’ may take some time to
resolve. If resolution is made a pre-condition to future E&P
investments, then investment rates could slow in the near term
and could have some risk on the exploration upside (Rs86 in our
SOTP valuation).
● Given the cost recovery PSC model, lower near-term production
has a smaller impact on NAV than on EPS. Marking to market,
current E&P/petchem rates would mean RIL’s FY12E EPS falls
10%, while NAV would fall only 2.5%. Maintain OUTPERFORM.
At the recent post-results analyst meet, RIL spoke of ongoing
discussions with the Directorate General of Hydrocarbons on multiple
issues related to several of its E&P blocks in India, and stated that it
was unable to comment on developments in the E&P business while
these discussions were going on. This is a change from the previous
quarter, when RIL did provide some comment on blocks (outside KG
D6). The Economic Times reported on Monday, 24 January 2011, that
RIL has written to the Secretary, Ministry of Petroleum, pointing out
difficulties and delays it now faces in even ‘routine matters’.
A broad spectrum of issues
The issues raised by the Directorate General of Hydrocarbons are not
limited to any particular block but includes several blocks operated by
RIL (blocks in KG basin, NEC, Cauvery basin, Cambay etc) pointing
to the generic nature of it. Among other things, the Directorate
General of Hydrocarbons has differed on capital budgets, disallowed
recovery of wells/other costs, asked for relinquishment of a block (due
to delay), differed with RIL on drilling objectives, asked for additional
compensation for blocks relinquished earlier and objected to RIL
vendor selection. Please refer to our detailed report, ‘Time for a
counsellor,’ published on 31 January 2011 for block-wise details of the
issues in the recent past.
The oil and gas business is governed by detailed regulation and
production sharing contracts. The DGH is required to ensure rules are
followed and being a government agency, is likely to exercise very
little discretion. RIL may, in turn, find that DGH rules do not allow
optimisation of its E&P objectives
Slow near term E&P activity?
The diverse and complex nature of RIL’s E&P ‘issues’ suggests they
may take time to resolve. If resolution is made a pre condition to
further E&P investments, then investment rates could slow in the near
term. We have Rs86 in our base-case RIL NAV for value of RIL’s E&P
upside, which can be at some risk. Additionally, with RIL worrying
about/waiting for the DGH, fixing current production issues at D6
could take longer than normal.
Our base-case NAV of Rs1,183 for RIL includes Rs258 for KG D6,
and Rs98 for other E&P fields. Given the cost recovery PSC model,
lower near-term production has a smaller impact on NAV than on
EPS. Marking to market, current E&P/petchem rates would mean
RIL’s FY12E EPS falls 10%, while NAV would fall only 2.5%. We
maintain our OUTPERFORM rating.
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