Reliance Industries (CMP: Rs890) Mkt Cap: Rs2.9trn; US$48.9bn Bloomberg code (RIL IN) Event: DGH objects to development of NEC 25 The Directorate General of Hydrocarbons (DGH) has reportedly refused to allow further development activity on the NEC 25 fields (discoveries D-32, D-40, D-9 and D-10), which collectively can produce ~10 mmscmd of gas by FY19, according to the March-end US$3.5bn Integrated Field Development Plan submitted by RIL. Impact: Delayed benefits from gas price hike After the euphoria around the gas price hike, regulatory confusion in the Indian upstream space has reared its head with the Ministry and the regulator speaking in different voices. This holdup implies that RIL will struggle to see any benefit of higher gas prices in the near term unless regulatory clearances are speeded up. We maintain that even with sufficient clearance, meaningful increase in volumes will come gradually, underpinning our conservative estimates of D6 ramp-up and our valuation of exploration/ development assets. This news highlights our concerns over Indian upstream regulation, where decision-making has slowed considerably over the last two years, ensuring that the ostensible intention of the gas price hike to boost exploration activity in the country will remain unfulfilled unless the other side of the coin, i.e., technical and fiscal clearances, is speeded up. Our view: Weak earnings, limited triggers in the near term At CMP, RIL remains at a premium to regional peers. The conflicting position taken by the DGH vis-à-vis the Oil Ministry, coupled with less than attractive metrics in the refining business, imply that upsides from here will be difficult. We also believe production increases, even if they come as scheduled (satellite fields on stream by FY17E, NEC by FY19E), are too far out to impact valuations of the E&P space as of now. We value the E&P segment at Rs128.8/ share (US$7.7bn), with an optimistic case delivering a value of Rs154.4/ share (US$8.6bn); Reiterate Neutral.
Posted on: Mon, 15 Jul 2013 08:43:32 +0000
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