21 June 2012 Update | Sector: Oil & Gas

Reliance Industries
BSE Sensex 17,033 S&P CNX 5,165

CMP: INR719

TP: INR760

Neutral

JV partner Niko cuts KG-D6 2P gas reserves by 80% to 1.9tcf
Additional investments contingent on gas price revision; cutting SOTP by INR25/sh
Bloomberg RIL IN Equity Shares (m) 3,271.0 52-Week Range (INR) 906/674 1,6,12 Rel. Perf. (%) -2/-12/-12 M.Cap. (INR b) 2,351.8 M.Cap. (USD b) 41.7

Valuation summary (INR b)
Y/E March 2012 2013E 2014E Net Sales 3,299 3,407 2,997 EBITDA 336 310 321 Net Profit 200 186 206 EPS (INR) 67.7 63.4 69.9 EPS Gr. (%) -1.1 -6.2 10.2 BV/Sh. (INR) 560.7 612.1 670.6 P/E (x) 10.6 11.3 10.3 P/BV (x) 1.3 1.2 1.1 EV/EBITDA (x) 6.9 7.4 6.7 EV/Sales (x) 0.7 0.7 0.7 RoE (%) 13.0 11.0 11.1 RoCE (%) 12.1 11.0 11.3

Niko Resources, the E&P JV partner of Reliance Industries, in its 'Reserves and Contingent Resources Update' has announced (1) reduction in KG-D6 2P gas reserves by 80% to 1.9tcf, and (2) its production guidance for next 7 years indicates decline in D1D3/MA production and increase in new gas production from D6 satellites fields and NEC-25 block, resulting in gross production of 44mmscmd by FY19 (v/s current rate of 32mmscmd). Niko stated that the reduced reserve estimates only pertain to the currently producing D1D3/MA fields and does not include satellite field reserves. Further, it stated that the additional capex will be contingent on gas price revision and government approval for the development plan.

RIL's 1P reserve higher than Niko's new 2P reserve: RIL does not give 2P reserve numbers and only gives out 1P reserve number in its annual report. Post the downgrade in FY12, RIL's 1P gas reserves were 104bcm (3.7tcf, net share number). It should be noted that RIL's reserve numbers also include its share in PMT (RIL stake at 30%). Even after adjusting PMT reserves (estimated), RIL's 1P reserve number will still be higher than Niko's 2P reserve number of 1.9tcf. Niko states that additional investments contingent on gas price revision: Niko stated that the new reserve estimates factor pertain only to the current producing fields - D1D3/MA and additional investment decisions on development plans (satellite and NEC) are contingent upon natural gas pricing (revision scheduled in March 2014). Further, it stated that the reserve/production estimates by Ryder Scott (independent reserve consultant) does not assume any additional drilling in D1D3/MA fields, as Ryder Scott believes that no new wells will be required to recover the revised 2P reserves in D1D3/MA fields in the KG-D6 block. Key things to watch on RIL: (1) Resolution of cost recovery issues with the government, (2) DGH approvals for E&P program and update on KG-D6 ramp-up, (3) Clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday), (4) Margin trend in refining and petchem, (5) Developments on USD12b capex plan, and (6) Update on BWA and retail foray.

Shareholding pattern % (Mar-12)
Others, 22.8

Foreign, 21.7

Domestic Inst, 10.6

Promoter 44.9

Stock performance (1 year)

Cutting SOTP; Maintain Neutral: We have cut our plateau production assumption from 60mmscmd in FY18 to 40mmscmd and cut our overall recovery from 10 tcf to ~7tcf. However, our FY13 and FY14 estimates remain unchanged. Our revised SOTPbased target price is INR760 (earlier INR785) as we cut our KG-D6 value to INR51/ share from earlier INR74/share and NEC-25 to INR13/share (earlier INR15/share). We maintain Neutral due to concerns of (1) RoE slipping to sub-12% levels, (2) falling KG-D6 volumes, and (3) increased share (75%) of cyclical refining and petchem businesses. The stock trades at 11.3x FY13E adjusted EPS of INR63.4 and 7.4x FY13E EV/EBITDA. Harshad Borawake (HarshadBorawake@MotilalOswal.com); +91 22 3982 5432 Deepak Dult (Deepak.Dult@MotilalOswal.com); +91 22 3982 5445
1

In MA.Reliance Industries Key takeaways from the Niko's concall Niko's reserves only from producing fields: Niko's KG-D6 reserve numbers only include reserves from producing D1/D3 and MA fields.  Niko downgrades 2P gross reserve estimates by 80% to 1.  Gas price hike critical for further capex: Gas price increase will be critical before committing further capex for integrated development plan for satellite fields. Niko is in favor of market determined gas pricing as against the current practice of getting the approval from Govt. of India. Company is hopeful of government approvals for this development plan as it will utilize the already built infrastructure at KG-D6 and will be cost effective. Integrated development plan will be submitted in later part of current year. Every company and country has different guidelines to categorize the reserves and Niko's reserves are based on Canadian regulations.9 tcf Source: Company/MOSL 21 June 2012 2 . However. Niko expects the capex at USD4b for integrated development plan.  Niko expects gas pricing to be market determined in India: The likely March 2014 gas price increase to USD8/mmbtu from current USD4/mmbtu mentioned in the Niko's press release is purely for the purpose to show sensitivity to its NPV and is not its expectation of the likely price revision in March 2014.  No additional drilling required in D1/D3 & MA to recover current estimated reserves: Niko mentioned that the reserve estimates by Ryder Scott does not assume any additional drilling in D1/D3 & MA fields. Niko further says that it is not sure of RIL's reserve composition given in RIL's FY12 annual report as it will also include reserves from its other fields (RIL also has 30% stake in PMT fields which currently produce ~15mmscmd gas). as it believes that no further wells will be required to recover the revised proved and probable reserves in D1/D3 and MA. JV has scheduled 1 more well.

 Niko had reduced its India gas reserves from 13tcf in FY10 to 9.772 158.295 307.859 675.532 As at March 31.  While. it expects production to just touch 44mmscmd.607 705.289 16 374. The reasoning is similar to that given by RIL during the recent downgrade.Reliance Industries Niko's reasoning for reserve downgrade Niko has indicated that the part of the reserve change relates to production. MOSL 3 .534 281.038 734.203 53.9 tcf in FY11 (gross for JV) As at March 31.307.699 990. 2010 Natural Gas Gross* (mmcf) Net* (mmcf) 568. b) An assessment of reservoir performance concluded that contrary to the previous geological model.916 364.677 1.611 942. but it is largely attributable to field performance and revised geological model.494 222. a) Field performance at D1/D3 field during 2011 demonstrated higher than expected pressure drawdowns resulting in material balance estimates to differ from in place gas volumes derived from geologic mapping. the current D1/D3 producing wells did not appear to be receiving any contribution from outside the main channel areas.831 864.e. c) Enhanced inter-connectedness of the main channel sands has resulted in increased water production and hence lowered the ultimate recovery. i.596 314.  Niko further stated that the revised geological model no longer anticipates reservoir outside the main channel fairways. FY19.  Niko's planned production v/s our current estimates (mmscmd) * Our estimate does not include NEC 21 June 2012 Source: Niko.593 510.164 171.152 13 195.959 33. 2011 Natural Gas Gross* (mmcf) Net* (mmcf) 340. Niko's production plan envisages production at just 18/21mmscmd in FY15/ 16 and even seven years from now.371 512.603 Reserves Category Proved Developed Producing Developed Non-Producing Undeveloped Total proved Probable Total proved plus probable Net number factor in the royalty impact/Profit Petroleum * Represents Niko 10% stake in KG-D6 Source: Niko Resources/MOSL Niko's production guidance much lower than RIL's AGM announcement RIL announced in its FY12 AGM that it targets to produce 60mmscmd of domestic gas on sustainable basis in next 3-4 years and expects to produce 30mmscmd of additional gas through development of R-series/satellite fields in KG-D6 and NEC25 blocks.

93) 3.66) (0.4bcm cut due to reservoir reassessment.6 (3.62 7.9 (3.38) Closing Balance 8.4bcm is for RIL's 60% stake and if we were to gross up.3 30% stake sale to BP Deletion led by reassessment of the reservoir Led by production during the year Source: Company/MOSL 4 .11 11.82) 103.5 6.6bcm reduction for stake sale to BP.42 Production (1.54 (3.2 30% stake sale to BP Deletion led by reassessment of the reservoir Led by production during the year Oil reserve life (based on 1P) has declined from 6 years to 3 years 220.5 34.82 107.61) 211. for 90% bal.44) (1.11 (1.84) (12. bal.63) 10. 1P gas reserves have been reduced from 185. and (c) 12.  Proved reserves were further reduced to account for stake sale to BP.8bcm cut led by production during the year.7 6. The reserve downgrade was partly compensated by D-34 discovery (not quantified). stake As a % open.29 8.38) 8.04) (1.2 11.61) (0.  Further.61) (19.69 0.47 5.89 130.99) 52.2 36.29 (1.42) (12.7 12. it has reduced proved gas reserve estimates by 7% based on production data v/s original production geological model.04) 11.Reliance Industries RIL had downgraded 1P gas reserves by 7% in its FY12 annual report RIL indicated that extensive reservoir studies are underway for augmenting production along with BP's technical teams.92) 47.69) (2.65) (2.9 23.82) 25.42 107.4 36.25) 54.93) 2.62) (12. Remarks Crude Oil (mmt) Opening Balance Transfer of interest to BP Addition/(deletion) Production Closing Balance Natural Gas (bcm) Opening Balance Transfer of interest to BP Addition/(deletion) Production Closing Balance 11. validated by experts.4 (58.13 (1.4 31.82 (56.97 8.5 11.62) Closing Balance 130.62) 185.36 (30.96 30.9 55. the actual reserve cut would be ~10%. the reserve cut of 12.21 211.62 Transfer of interest to BP Addition/(deletion) 4. which was declared to be commercial.82 Transfer of interest to BP Addition/(deletion) 11.82 185. (b) 12.0 30% stake sale to BP Deletion led by reassessment of the reservoir Led by production during the year Gas reserve life (based on 1P) has declined from 9 years to 8 years Crude Oil (mmt) Opening Balance 4.06 20.  However.36 *RIL sold 30% stake in 21 E&P blocks to BP 21 June 2012 7.35 (14.1 30% stake sale to BP Deletion led by reassessment of the reservoir Led by production during the year 28.66 Natural Gas (bcm) Opening Balance 133.84) Production (14.21 (5.  1P reserves decline due to reservoir reassessment (apart from production and third-party transfer) Proved Reserves FY10 FY11 FY12 As a % Restated open.66 (1.1 31.16 21. Key reasons for reserve downgrade cited by RIL were: a) Decline in pressure / production has been higher than originally predicted b) Volumes connected to existing wells are lower than envisaged c) Gas outside the main channel is in small uneconomic volumes and not participating in production.9 (18.02 1.77) (19.8bcm to 104bcm led by: (a) 56.54) (38.

Mukta .475 NELP .904 16 KG-DWN-2004/7 11.890 NELP .822 21 MN-DWN-2004/5 10.VI 15 KG-DWN-2004/4 11. approval for development plan Under production Expect to submit FDP for 1 gas discovery Relinquished DGH has granted 6-month extension for Ph-1 Submitted DoC for one discovery Appraisal program for one discovery submitted 4 gas discoveries.VII 22 KG-DWN-2005/2 1.813 19 MN-DWN-2004/3 11.454 NELP .III 9 KK-DWN-2001/1 20.325 12 CY-PR-DWN-2001/3 8.468 10 KK-DWN-2001/2 23.856 17 MN-DWN-2004/1 9.533 4 SR-OS-94/1 1. Km) 1-2 Panna .885 18 MN-DWN-2004/2 11.040 6 NEC-OSN-97/2 (NEC-25) 10.645 NELP . To drill 2 more wells by 1HCY13 8 oil discoveries. no immediate further plans At At At At At At At exploratory exploratory exploratory exploratory exploratory exploratory exploratory stage stage stage stage stage stage stage At exploratory stage Source: Company/MOSL Niko expects the integrated development plan to be submitted by end-2012 Niko expects NEC-25 production to commence in FY19 Source: Niko Resources 21 June 2012 5 .II 8 GS-OSN-2000/1 5.846 Status of key blocks Under production Likely to be relinquished Likely to be relinquished Likely to be relinquished Awaiting govt.515 11 CY-DWN-2001/2 14.316 20 MN-DWN-2004/4 8.V 13 KG-DWN-2003/1 (D3) 3.678 Pre-NELP 3 CB-ON-1 1.755 7 KG-DWN-98/3 (KG-D6) 7.288 14 CB-ONN-2003/1 635 NELP .600 NELP .Reliance Industries Status of RIL's key E&P blocks Sl No Name of the Block Area (Sq.Tapti 2.949 Total Domestic 183.I 5 SR-OSN-97/1 5.

3 Singapore GRM 5.0 67.7 5.0 11. We maintain Neutral due to concerns of (1) RoE slipping to sub-12% levels.8 Wellhead Gas Price (USD/mmbtu) 114. Key things to watch would be 1) Resolution of cost recovery issues with govt.6 13.Reliance Industries Valuation and view Our assumptions for RIL: 1) Average gas production of 28/22mmscmd for FY13/14.2 4.5 110.3 8.8 FY13E 50.8 10.4 and 7.6 109 8.0 Capacity Utilization (%) 97 GRM (USD/bbl) Blended GRM 12. 2) clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday).2 Source: Company/MOSL 6 21 June 2012 .2 0.4x FY13E EV/EBITDA Segmental EBIT break-up Segmental EBIT (INRb) Refining Petrochemicals E&P Total Segmental EBIT share (%) Refining Petchem E&P Total FY09 96 69 23 188 51 37 12 100 FY10 60 86 55 200 30 43 27 100 FY11 92 93 67 252 36 37 27 100 FY12 97 90 53 239 40 38 22 100 FY13E 94 89 32 215 FY14E 102 103 28 233 44 44 41 44 15 12 100 100 Source: Company/MOSL RIL: Key Assumptions Key Metrics FY09 FY10 47. (2) falling KG-D6 volumes. Cutting SOTP.3/bbl in FY13 and USD9/bbl in FY14. our FY13 and FY14 estimates remain unchanged. 3) Tax holiday on KG-D6 gas profits.2 4. Maintain Neutral: We have cut our plateau production assumption from 60mmscmd in FY18 to 40mmscmd and cut our overall recovery from 10 tcf to ~7tcf.8 22. 2) Well-head gas price of USD4.7 4.9 62. Our revised SOTP-based target price is INR760 (earlier INR785) as we cut our KG-D6 value to INR51/share from earlier INR74/share and NEC-25 to INR13/share (earlier INR15/share). The stock trades at 11.1 62.0 60.5 4.6 98 6.9 86.6 3. and (3) increased share (75%) of cyclical refining and petchem businesses.0 Exchange Rate (INR/USD) 45.8 Refining Capacity (mmt) 33. 4) developments on it USD12b capex plan and 5) update on its BWA and retail foray.5 56.5 62. However.0 4.1 42.3 0.0 FY14E 48.2 FY12 47.7 69.2 FY11 45.5 E&P Gas Production (mmscmd) Oil Production (kbd) Pricing Brent Oil (USD/bbl) 84.0 100.0 66.5 107 8.0 Production (mmt) 32.0 62.0 66.2 3.4 107 9. and DGH approvals for its E&P program and update on its KG-D6 ramp-up.0 8.9 3.4 8. 3) margin trend in refining and petchem.6 62.0 67.3 39.7 109 8.2 0.8 Premuim to Singapore 6.2 18.1 28.0 11.3x FY13E adjusted EPS of INR63.2/mmbtu. and 4) Blended GRM of USD8.

INR/sh 508 271 237 152 43 9 13 Remarks/Methodology Core business EV @6x FY13E EBITDA EV @6. 60% stake. EV @4. 0.75x equity investments FY13E Based on fully diluted equity shares of 2. 60% stake. 60% stake.962m (excl 309m treasury shares) Source: Company/MOSL 1 1 1 34 31 40 11 10 14 PMT Investment in Shale Gas Investments RGTIL.9 (Yemen) 0 1 INR b 1. RIL (60%) Sohagpur East & West (CBM) Block .7 TCF. OGIP of 3. 100% stake. 2P reserves of 330 mmbbls valued. RIL stake 25% Currently producing. Plateau of 40mmscmd in FY18.USD90/bbl) DCF. Production in 2019 Prospective resources of 695mmboe as DCF. assumed 50% recovery valued at @USD20/bbl. assumed 50% recovery Currently producing. 6. (LT Brent .5x FY13E EBITDA JV with Atlas.252 33 17 46 8 11 16 11 21 -33 760 21 June 2012 7 .504 803 701 450 127 26 38 Adj. OGIP of 3.25 (Mahanadi basin) KG-DWN-2003/1 (D3) per Hardy.5TCF recovery DCF.D6 MA1 Oil (KG Basin) NEC . RIIL and SEZ At book value and 20% discount to estimated book value BWA Foray Valud at 0. valued at cash investment Includes RGTIL.5x FY13E EBITDA DCF. Pioneer & Carrizo.D6 Gas (KG Basin) 2 KG . 47mmbbls recovery.65 TCF.Reliance Industries Reliance: Sum of parts valuation Business USD b Core business: 28 Refining 15 Petchem 13 E&P Initiatives 8 KG .75x equity investment 100% subsidiary of RIL. RIIL fuel Retailing BWA SEZ Reliance Retail Less: Net Debt Total Base Value 2 1 3 0 1 1 1 1 -2 42 99 51 136 24 32 48 32 63 -98 2.

515 674 116 2.661 684 121 2.3 28.782 21 June 2012 8 .2 2012 3.Reliance Industries Financials and Valuation Income Statement Y/E March Net Sales Change (%) EBITDA % of Net Sales Depreciation Interest Other Income PBT Tax Rate* (%) PAT Adj. (incl sh.3 12.3 9.372 625 109 2.0 Balance Sheet Y/E March Share Cap.798 682 126 2.0 2014E 2.0 6.1 101 29 66 245 59 24.8 2011 2.0 162 162 4.9 105 20 25 205 43 21.407 3.482 28.606 2106 1019 1.3 233 16.7 56.088 112 580 2014E 32 1939 1.0 8.7 95 29 76 273 67 24. Susp. Assets.0 22.299 32.997 -12.782 2166 1114 1.418 6.6 (INR Billion) 2013E 3.137 78 540 (INR Billion) 2013E 32 1765 1.9 381 15.1 321 10.305 442 43 712 2.9 39.and Other CA Current Liab.3 310 9.533 121 232 2011 33 1483 1.6 203 203 24. & Prov.7 306 15. Liabilities Provisions Net Current Assets Application of Funds E: MOSL Estimates 2009 31 1232 1.606 321 49 941 2.4 136 23 31 252 50 19.427 128 377 2012 33 1628 1.106 497 46 373 2.100 368 36 220 2.925 35.9 336 10.4 42.305 2213 785 1.2 8.) Reserves Net Worth Total Loans Deferred Tax Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr.0 2010 1.003 690 216 2010 33 1339 1.106 2159 626 1.1 186 186 -7.466 365 46 826 2.053 169 620 148 46 222 131 270 117 135 103 298 174 271 171 360 184 396 257 374 183 417 264 327 161 552 272 327 30 190 2.971 679 132 2.100 1496 493 1.9 8.3 0.4 52 17 21 184 31 16.9 153 156 2. Inventory Debtors Cash & Bank Balance Loans&Adv.6 206 206 10.2 200 200 -1.2 114 27 62 258 57 22.466 2055 918 1.264 739 97 2. PAT Change (%) Key Operating Metrics GRM (USD/bbl) KG-D6 production (mmscmd) 2009 1. L & Adv.

0 21 1.5 6.2 12.4 10.) Valuation (x) P/E Adj.6 0. P/E Cash P/E EV / EBITDA EV / Sales Adj. Activity Change in Equity Inc / (Dec) in Debt Dividends Paid CF from Fin. Capital Other op activities CF from Op.6 11.5 511.8 1.4 11.4 0.5 2010 49.0 13.4 15 1.7 10. Book Value DPS Payout (incl.8 81. Activity Inc / ( Dec) in Cash Add: Opening Balance Closing Balance E: MOSL Estimates 21 June 2012 2009 184 72 2 -19 -38 -19 182 -247 24 -18 -241 152 105 -19 237 179 43 222 2010 205 135 -1 -31 -53 -50 205 -218 -12 48 -182 1 -88 -22 -110 -87 222 135 2011 252 162 -3 -42 1 -38 333 -121 -141 59 -203 2 30 -24 7 137 135 271 2012 258 137 -17 -48 -28 -32 270 -80 62 -12 -30 -2 -85 -28 -115 125 271 396 (INR Billion) 2013E 245 101 -37 -54 -93 0 163 -86 -40 66 -60 -20 -32 -29 -81 21 396 417 2014E 273 95 -47 -62 20 0 279 -116 -40 76 -80 0 -31 -32 -64 135 417 552 9 .0 15.0 20 1.7 69.1 7.5 6.8 12. Div.0 16. Price / Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (No.7 463.9 0.5 11.7 2012 61.4 -0.4 63.4 103.2 8.3 14.3 1. EPS (ex Treasury) Cash EPS Adj.3 14 1.4 88.0 11.7 96.1 8.6 612.5 670.9 6. Tax.5 6.1 1.3 7.1 Cash Flow Statement Y/E March OP/(Loss) before Tax Depreciation Interest /Other Income Direct Taxes Paid (Inc)/Dec in Wkg.6 54.3 69.1 0.7 12.6 9.5 14.6 10.5 13.2 20 1.9 92.3 67.Reliance Industries Financials and Valuation Ratios Y/E March Basic (INR) EPS Adj.2 7.1 11. of Days) Fixed Asset Turnover (x) Leverage Ratio Net Debt / Equity (x) 2009 52.1 11.7 1.4 1.6 7.7 0. Activity (Inc)/Dec in FA & CWIP (Pur)/Sale of Investments Other In activities CF from Inv.0 11.0 12.0 68.7 1.3 8.3 15.1 0.3 2014E 63.8 6.6 58.3 21 1.7 1.5 14.1 560.5 0.1 475.1 11.0 1.0 2011 62.9 13.2 1.7 8.5 17.7 2013E 57.2 11.1 0.

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