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UBS Investment Research
Reliance Industries
We cut TP to Rs 1050/share and earnings by 1.9%/2.1%/6.7% for FY11/12/13E.
This is primarily on lower gas production; we expect gas production at 60mmscmd
vs. earlier assumption of 80 in FY13. We expect gas price increase (US$4.2 to 6.2)
from FY15.
„ Recent decline in KG-D6 volumes – concern on peak production
The company has given no volume guidance but current production drop suggests
that a sharp ramp up is unlikely. We cut peak production from D1 and D3 fields
(part of the KG D6 block) on 1) decline in recent months to 42-44mmscmd, 2)
analysis of channel checks, and 3) lack of guidance from the company. We are risk
adjusting our expectation on peak production. However, we do acknowledge that
higher production is possible, which is a key risk to our earnings.
„ It is unlikely that company cut production to gain from FY15 price hike
Gas price of US$6.2 in 4 years is $4.2 today: We increasingly believe that the
current decline in production is more due to technical reasons. A section of the
market believes that the company is cutting production to force higher prices or
gain from FY15 price hike. We believe that while higher prices will lead to a
higher NPV, lower volumes also hits the NPV of the field. Moreover, higher prices
and volume will also increase govt. share sooner.
„ Valuation: SOTP based PT of Rs 1,050, maintain Neutral rating
The stock has underperformed BSE Sensex by 9.7% in 6MTD and is currently
trading at 13.8x FY12e P/E and 7.7x FY12e EV/EBITDA.
Cut earnings and TP on lower gas production
We cut our forecast of peak production from the D1/D3 fields to 60mmscmd
(2.1bcfpd) from our earlier forecast that the fields would reach 80mmscmd
(2.8bcfpd) in FY13. This is given our concern over recent gas output decline to
42-45mmscmd, which the company has not addressed. We believe gas
production can be higher but that will happen from newer fields/satellite fields
and will therefore take longer than our earlier expectation. The current KG D6
block is estimated to hold upto 30-40tcf of gas but of this approx 11tcf is proved.
Therefore while the block has huge reserves, the company needs to work to
convert in place reserves to recoverable through appraisal drilling and putting up
a developmental plan. Every 10mmscmd change in gas impacts earnings by 4-
5%
We believe the current decline in gas production is technical. Contrary to some
market expectation we do not believe the current decline is pricing related i.e. to
lobby for higher gas prices. Our analysis of sensitivity of price vs volumes
reveals that cutting production now to take advantage of higher prices later (say
FY15 when the current gas price period runs out), does not meaningfully
improve the NPV of the company interest. This is because although higher gas
prices lead to higher NPV, lowering volume initially also negatively impacts
NPV. Also NPV of US$6.2/mmbtu, which is our assumption of gas price for
FY15, is cUS$4.2/mmbtu.
The best case scenario is to get higher prices immediately, but if it is certain that
prices will be hiked only in FY15 then it is best to keep production high all
thorough. The reason for asking for higher gas prices in our view is linked to
rising cost of developing new fields. The current field production (D1 and D3) is
based on a capex of some US$9bn and proved reserves of 11tcf. Going forward
it is likely that new field development will be more expensive if the new
discoveries are more scattered and if they individually hold less reserves that the
current blocks.
Valuation
We have cut our target price by 8.7% to Rs1,050/share from the earlier
Rs1,150/share primarily due to lower gas volumes.
Q Reliance Industries
Reliance Industries (RIL) is the largest integrated oil and gas company in India.
Its three main businesses are exploration & production, refining and
petrochemicals. Its two refineries in Jamnagar, Gujarat have among the highest
complexity globally and a combined capacity of 1mbpd. The company's FY10
turnover was US$46bn. It derives more than 50% of its revenue from exports.
Q Statement of Risk
We believe gas volumes from KG-D6 are key drivers of the stock’s performance.
Refining and petrochemical margins are also major drivers of the company’s
earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Reliance Industries
Low on gas -
„ Cutting our EPS and Target Price
We cut TP to Rs 1050/share and earnings by 1.9%/2.1%/6.7% for FY11/12/13E.
This is primarily on lower gas production; we expect gas production at 60mmscmd
vs. earlier assumption of 80 in FY13. We expect gas price increase (US$4.2 to 6.2)
from FY15.
„ Recent decline in KG-D6 volumes – concern on peak production
The company has given no volume guidance but current production drop suggests
that a sharp ramp up is unlikely. We cut peak production from D1 and D3 fields
(part of the KG D6 block) on 1) decline in recent months to 42-44mmscmd, 2)
analysis of channel checks, and 3) lack of guidance from the company. We are risk
adjusting our expectation on peak production. However, we do acknowledge that
higher production is possible, which is a key risk to our earnings.
„ It is unlikely that company cut production to gain from FY15 price hike
Gas price of US$6.2 in 4 years is $4.2 today: We increasingly believe that the
current decline in production is more due to technical reasons. A section of the
market believes that the company is cutting production to force higher prices or
gain from FY15 price hike. We believe that while higher prices will lead to a
higher NPV, lower volumes also hits the NPV of the field. Moreover, higher prices
and volume will also increase govt. share sooner.
„ Valuation: SOTP based PT of Rs 1,050, maintain Neutral rating
The stock has underperformed BSE Sensex by 9.7% in 6MTD and is currently
trading at 13.8x FY12e P/E and 7.7x FY12e EV/EBITDA.
Cut earnings and TP on lower gas production
We cut our forecast of peak production from the D1/D3 fields to 60mmscmd
(2.1bcfpd) from our earlier forecast that the fields would reach 80mmscmd
(2.8bcfpd) in FY13. This is given our concern over recent gas output decline to
42-45mmscmd, which the company has not addressed. We believe gas
production can be higher but that will happen from newer fields/satellite fields
and will therefore take longer than our earlier expectation. The current KG D6
block is estimated to hold upto 30-40tcf of gas but of this approx 11tcf is proved.
Therefore while the block has huge reserves, the company needs to work to
convert in place reserves to recoverable through appraisal drilling and putting up
a developmental plan. Every 10mmscmd change in gas impacts earnings by 4-
5%
We believe the current decline in gas production is technical. Contrary to some
market expectation we do not believe the current decline is pricing related i.e. to
lobby for higher gas prices. Our analysis of sensitivity of price vs volumes
reveals that cutting production now to take advantage of higher prices later (say
FY15 when the current gas price period runs out), does not meaningfully
improve the NPV of the company interest. This is because although higher gas
prices lead to higher NPV, lowering volume initially also negatively impacts
NPV. Also NPV of US$6.2/mmbtu, which is our assumption of gas price for
FY15, is cUS$4.2/mmbtu.
The best case scenario is to get higher prices immediately, but if it is certain that
prices will be hiked only in FY15 then it is best to keep production high all
thorough. The reason for asking for higher gas prices in our view is linked to
rising cost of developing new fields. The current field production (D1 and D3) is
based on a capex of some US$9bn and proved reserves of 11tcf. Going forward
it is likely that new field development will be more expensive if the new
discoveries are more scattered and if they individually hold less reserves that the
current blocks.
Valuation
We have cut our target price by 8.7% to Rs1,050/share from the earlier
Rs1,150/share primarily due to lower gas volumes.
Q Reliance Industries
Reliance Industries (RIL) is the largest integrated oil and gas company in India.
Its three main businesses are exploration & production, refining and
petrochemicals. Its two refineries in Jamnagar, Gujarat have among the highest
complexity globally and a combined capacity of 1mbpd. The company's FY10
turnover was US$46bn. It derives more than 50% of its revenue from exports.
Q Statement of Risk
We believe gas volumes from KG-D6 are key drivers of the stock’s performance.
Refining and petrochemical margins are also major drivers of the company’s
earnings.
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