[T.S.R:17147] RIL-BUY; Target Rs 1200

As per media reports, Reliance Industries (RIL) has intimated the DGH that KG-D6 production could fall further to 46–47mmscmd (versus its earlier guidance of 60mmscmd), given the reservoir complexity and current performance . In our view, RIL's production problems are not atypical for a relatively new field in a largely unchartered deepwater area, where the formation is "wet" (i.e. contains a lot of water).

 

We believe RIL has been proactive in resolving this issue by bringing in BP Plc as a 30% partner in its NELP blocks in India. BP brings with it rich experience of deepwater exploration and is of the view that the field can achieve 80mmscmd of gas production. We feel that early regulatory approval for the RIL–BP deal will pave the way for enhanced exploration activity and production across RIL's deepwater blocks. Maintain BUY.

 

Further drop in gas production anticipated:

RIL, operator of the KG-D6 block, has informed the DGH that natural gas production could drop further to 38mmscmd from the D1 and D3 fields (currently 44–45mmscmd) and 9mmscmd from the MA field—taking total production to 47mmscmd for FY12-FY13, down from the earlier guidance of 60mmsmcd. RIL, however, commented that the fall in production can be arrested if radical measures are taken and that long-term output would be dependent on the success of work-over jobs and on reservoir complexities.

 

New drills to contribute only in long term:

RIL plans to drill five additional wells in the KG-D6 block to increase production, as per the phase-I FDP. However, given the brief operational window of four months (Dec to Apr) and lead time involved in procurement of plant and equipment, the wells wouldn't contribute to production before mid-2014. RIL has further planned to install a new FPSO (floating production and storage facility) near the field in order to improve operational efficiency. The company argues that given deepwater production conditions, it is imperative to have an FPSO nearer to production than farther.

 

Actual expense less than budgeted:

Reports suggest that RIL has spent US$ 5.6bn as compared to the initial budgeted US$ 6.1bn on the KG-D6 block. As for falling short on its FDP drilling target, RIL commented that subsurface conditions and

complexity of the block do not justify drilling of additional wells in the main channel and that current gas prices make drilling in surrounding pockets unviable.

 

Maintain BUY:

Even after considering the worst case scenario of 45mmsmcd of long-term gas production from the KG-D6 block, our target price of Rs 1,200/sh will reduce by only ~Rs 40/sh, while EPS for FY12 and FY13 will decline to Rs 64 and Rs 70 from Rs 66.7 and Rs 73.2 respectively. However, we believe it is too early to take this call and we will revisit our numbers once BP comes on board. We maintain our BUY rating on RIL with a target price of Rs 1,200/sh. At CMP the stock is trading at a P/E of 13x and EV/EBITDA of 8x on FY13E.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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