>RELIANCE INDUSTRIES: What Does Shale Gas Mean to Reliance? (MORGAN STANLEY)

■ Update on the Reliance-Atlas JV: Atlas Energy, Reliance’s (RIL) JV partner in the Marcellus Shale assets, held a conference call on 12th April. Based on the call and our discussion with RIL management, we have built a business model to understand the impact of shale gas assets on RIL. Our key conclusions are:

■ Base case scenario – we estimate gas production of 16 mmscmd (net to RIL): The Marcellus Shale JV should contribute US$793mn in EBITDA and US$488mn to RIL’s PAT in 2014. We expect the JV’s production to ramp up to 24mmscmd by 2019.

■ JV shale gas assets equate to NPV of Rs.13.4/share: We expect Reliance to invest $5.3bn in the JV, including the acquisition cost of $1.7bn. Assuming a discount rate of 10%, we estimate that RIL’s investments have a NPV of US$987m. We estimate the IRR of the investment to be 19% including acquisition cost.

■ Lower acreage cost considering optionality: At the deal value of US$1.7bn, the acreage acquisition cost is $14,167/acre – however, if we discount RIL’s obligation to pay 75% of Atlas’ capex over the next 5.5 years at a rate of 10%, the cost falls to $10,797/acre. This could further decline to $9,480/acre, since RIL has the ‘Right of First Offer’ to acquire 278,000 acres at $8,000/acre and another 222,000 acres at $5,000/acre, whenever Atlas decides to sell these assets.

■ Potential impact on earnings/PT is marginal: We estimate that the JV could add Rs6.6/share to RIL’s FY2015 EPS – 5-6% of earnings then, ~8% of FY2012 EPS. Applying a target multiple of 9x (based on global comps) could add Rs 59/share to our RIL target price.

To read the full report: RELIANCE INDUSTRIES