>Reliance Industries (MACQUARIE RESEARCH)

Countdown to first gas.....

Event
■ In line with our recent Oil Yatra (tour) ‘Next Gen opportunity’ takeaways, the countdown to RIL’s first gas flows has begun. RIL has signed the Gas Sales and Purchase Agreements (GSPA) with 15 fertiliser units for supply of gas to be produced from the KG-D6 block. This will be followed by the signing of the GSPA with the existing gas-based power producers. RIL is expected to start gas production in the next few days and fuller supplies will start by mid-April.

Impact
■ Fertiliser GSPA paves way for sale of first gas. The fertiliser companies had raised certain objections to RIL’s draft GSPA regarding the take-or-pay clause, term of the contract, currency of payment etc. Almost all of these issues were resolved amicably; following which RIL signed GSPAs with 12 fertiliser companies for supply of ~15mmscmd of gas at 15 urea facilities.

■ GSPA with power plants to follow. The Empowered Group of Ministers have allocated top priority to the existing gas-based urea plants, followed by LPG plants, existing gas-based power plants and city gas for allocation of KGD6 gas. As KG-D6 gas is lean, during the ramp up of production to 40mmscmd, the power sector would get higher priority than the LPG sector.
We expect RIL to sign GSPA with the power plants as KG-D6 production is expected to increase from initial 10mmscmd to 40mmscmd by July 2009. Also RIL itself is already geared to offtake and is lobbying hard for nearly 20mmscmd at its existing refinery and petrochemical facilities.

■ Large gas deficit in medium term. During our recent Oil and Gas Yatra, the Fertiliser Association said the fertiliser sector has 40mmscmd of an additional requirement. In addition, two power majors, NTPC (NATP IN, Rs184, NR) and Reliance Power (RPWR IN, Rs101, NR), alone have the ability to offtake an additional 50mmscmd of gas, which compares with RIL’s planned production of 80mmscmd. Estimates of 10mmscmd of city gas distribution demand from 20 cities would be understated given longer-term plans for 230 cities.

■ Tip of the iceberg. During our Yatra, the Director General of Hydrocarbons (DGH) demonstrated that RIL’s KG-D6’s start-up is only the tip of the iceberg and there is a very large potential on the east coast. Currently, there are 11 seismic vessels working in the east coast and this will be followed by drilling when the blocks enter the subsequent phases. Initial data from deepwater blocks on the west coast also looks very promising. The hydrocarbon signatures on India’s east coast look similar to Qatar’s.

Earnings revision
■ No change.

Price catalyst
■ 12-month price target: Rs1,675.00 based on a Sum of Parts methodology.

■ Catalyst: New oil and gas finds and enhanced clarity on organised retail.

Action and recommendation
■ RIL has a large portfolio of highly prospective blocks and its exploratory success rate is the best amongst peers. We estimate RIL’s profits to rise 70% in FY10E, purely from volume growth, despite an assumed cyclical downturn.

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