Reliance Industries
Shale gas, CBM next growth avenues
Event
RIL reported a PAT of Rs57.03bn for 2QFY11, a modest growth of 16% YoY,
exactly in line with forecasts. A 28% YoY rise in GRM was the key driver. A
revival in domestic petrochemical demand, higher exports and a 2.4% INR
depreciation offset an 18% dip in gas volumes. RIL's US shale gas production
is rapidly ramping-up. We maintain our Outperform with a TP of Rs1,083.
Impact
Refining EBIT +37% YoY, but -4% QoQ: RIL’s GRM’s rose 28% YoY to
US$10.1/bbl, but fell QoQ by US$0.2/bbl. Premium over Singapore complex
narrowed YoY from US$1.8/bbl to US$0.2/bbl, as light-heavy crude oil
differential narrowed by US$1.3/bbl. Also benefit of a US$3/bbl rise in gasoline
spread was partially offset by a US$2.7/bbl contraction in spread by US$2.7/bbl
of major product, diesel. RIL achieved a record 110% utilization.
Petrochem EBIT rises 10% on domestic demand rebound. Inventory restocking
due to price revival enabled a 21% QoQ demand surge. Exports,
primarily to China also surged rising to 1/3rd of turnover. Polymer margin revival
should strengthen off lows as global capacity additions shrink. Polyester
margins should also remain healthy. While cotton prices have halved cotton –
polyester price spread remains a healthy ~US$800/t vs historical average of
US$350/t. RIL is negotiating technology for its gas cracker. Polyester chain
expansion implementation has commenced and RIL expects production to
double from 6.5m tpa to 14m tpa over 42 months.
KGD6 output fell 22% YoY to 46.3mmscmd. This precipitated a 10% YoY fall
in upstream EBIT. KG production revival is unlikely prior to 2015. BP-RIL
started re-assessment in true earnest, but has deferred fresh drilling till
4QFY12. The business head stated that RIL has not cut reserves as gas is
distinctly visible, but is proving difficult to extract. RIL is working with regulator
for developmental approval for R1 cluster and satellite wells in KGD6.
Shale gas ramping up: Production with Chevron and Pioneer JVs started,
achieving gross production of 210 mmscfd of gas and 24.7mbpd of condensate.
Carrizo production should start in 3QFY12 along with pipeline connectivity.
Shale gas isn’t reflected in current standalone 2QFY12 results.
CBM taking shape: RIL has drilled 26 wells towards a target of 112. They can
commence production in 24 months after they receive government approval on
LNG-linked pricing (at 3x of KGD6). Production would plateau at 4mmscmd, ie,
1/10th of current KG production. Given its strong balance sheet (US$10bn cash,
net gearing of 14%, plus US$7.2bn to be received from BP) and extremely
large cash flows of US$6-7bn pa, the company is in the process of formalizing
plans for even stronger growth.
Action and recommendation
Our second independent institutional investor e-survey on RIL suggests that
investor portfolios remain underweight RIL, but mindsets have turned positive,
perhaps explaining the 6% quarterly stock outperformance vs Sensex. We think
RIL presents compelling value and that upstream business is available for free
as BP has paid nearly as much for 1/3rd stake as entire upstream value.
Moreover, at 1.1x book value, Reliance Industries is at low end of historical
valuation range.
Shale gas, CBM next growth avenues
Event
RIL reported a PAT of Rs57.03bn for 2QFY11, a modest growth of 16% YoY,
exactly in line with forecasts. A 28% YoY rise in GRM was the key driver. A
revival in domestic petrochemical demand, higher exports and a 2.4% INR
depreciation offset an 18% dip in gas volumes. RIL's US shale gas production
is rapidly ramping-up. We maintain our Outperform with a TP of Rs1,083.
Impact
Refining EBIT +37% YoY, but -4% QoQ: RIL’s GRM’s rose 28% YoY to
US$10.1/bbl, but fell QoQ by US$0.2/bbl. Premium over Singapore complex
narrowed YoY from US$1.8/bbl to US$0.2/bbl, as light-heavy crude oil
differential narrowed by US$1.3/bbl. Also benefit of a US$3/bbl rise in gasoline
spread was partially offset by a US$2.7/bbl contraction in spread by US$2.7/bbl
of major product, diesel. RIL achieved a record 110% utilization.
Petrochem EBIT rises 10% on domestic demand rebound. Inventory restocking
due to price revival enabled a 21% QoQ demand surge. Exports,
primarily to China also surged rising to 1/3rd of turnover. Polymer margin revival
should strengthen off lows as global capacity additions shrink. Polyester
margins should also remain healthy. While cotton prices have halved cotton –
polyester price spread remains a healthy ~US$800/t vs historical average of
US$350/t. RIL is negotiating technology for its gas cracker. Polyester chain
expansion implementation has commenced and RIL expects production to
double from 6.5m tpa to 14m tpa over 42 months.
KGD6 output fell 22% YoY to 46.3mmscmd. This precipitated a 10% YoY fall
in upstream EBIT. KG production revival is unlikely prior to 2015. BP-RIL
started re-assessment in true earnest, but has deferred fresh drilling till
4QFY12. The business head stated that RIL has not cut reserves as gas is
distinctly visible, but is proving difficult to extract. RIL is working with regulator
for developmental approval for R1 cluster and satellite wells in KGD6.
Shale gas ramping up: Production with Chevron and Pioneer JVs started,
achieving gross production of 210 mmscfd of gas and 24.7mbpd of condensate.
Carrizo production should start in 3QFY12 along with pipeline connectivity.
Shale gas isn’t reflected in current standalone 2QFY12 results.
CBM taking shape: RIL has drilled 26 wells towards a target of 112. They can
commence production in 24 months after they receive government approval on
LNG-linked pricing (at 3x of KGD6). Production would plateau at 4mmscmd, ie,
1/10th of current KG production. Given its strong balance sheet (US$10bn cash,
net gearing of 14%, plus US$7.2bn to be received from BP) and extremely
large cash flows of US$6-7bn pa, the company is in the process of formalizing
plans for even stronger growth.
Action and recommendation
Our second independent institutional investor e-survey on RIL suggests that
investor portfolios remain underweight RIL, but mindsets have turned positive,
perhaps explaining the 6% quarterly stock outperformance vs Sensex. We think
RIL presents compelling value and that upstream business is available for free
as BP has paid nearly as much for 1/3rd stake as entire upstream value.
Moreover, at 1.1x book value, Reliance Industries is at low end of historical
valuation range.
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