>RELIANCE INDUSTRIES: Shale gas business turns profitable

■  We did try. We have updated our earnings model for RIL’s FY2012 annual report.
A difficult operating environment in the core chemical and refining segments, declining reserves and regulatory issues in the E&P segment and fair valuations constrain us from taking a more positive view on the company despite the recent sharp correction in the stock price. We maintain our REDUCE rating on RIL stock with a revised 12-month forward TP of `730 (`770 previously); the reduction in TP reflects lower valuation to the
E&P segment and higher net debt.



■ Sharp decline in proved developed oil and gas reserves
RIL has reduced its estimates of proved reserves (excluding BP’s share) for (1) oil by 2.61 mn tons to 3.06 mn tons and (2) gas by 12.4 bcm to 104 bcm as of end-FY2012. The revision in proved reserves reflects (1) downward revision in reserves for D1, D3 and MA-1 fields, (2) downward revision in reserves for satellite fields (D2, D6, D22 and D26), (3) inclusion of reserves from R-series discovery (D34) and (4) upward revision in gas reserves for CBM fields. Proved developed reserves have declined sharply for (1) oil by 2.66 mn tons to 2.42 mn tons and (2) gas by 38.8 bcm to 25.2 bcm as of end-FY2012. We highlight that RIL’s current proved developed reserves correspond to around three years of production of gas and oil, assuming production were to continue at the current levels. Exhibit 1 gives details of movement in RIL’s proved reserves.


■ Shale gas business turns profitable; E&P and retailing subsidiaries continue to make losses
RIL’s subsidiaries in the US shale gas business reported a cumulative net income of `3.7 bn despite lower gas prices reflecting higher contribution from condensate production. RIL’s international E&P subsidiary, Reliance Exploration and Production DMCC, reported a loss of `3.9 bn versus `8.8 bn in FY2011. The loss includes write-off of `2.6 bn (`8.1 bn in FY2011) from recently relinquished blocks––(1) Block-18 and Block-41 in Oman and (2) Block-K in East Timor. RIL’s retailing subsidiaries reported a net loss before taxes of `6.5 bn on sales of `74 bn in FY2012 compared to a loss of `6.5 bn on sales of `61 bn in FY2011.


■ Fine-tune estimates; maintain REDUCE with a TP of `730
We have revised our EPS estimates for FY2013E, FY2014E and FY2015E to `57.4 (+1.9%), `59.7 (+1.7%) and `67.1 (-3.6%) reflecting (1) weaker exchange rate assumptions for FY2013-14E, (2) FY2012 annual report and (3) other minor changes. We maintain our REDUCE rating on the stock with a 12-month forward SOTP-based target price of `730 (`770 previously).


To read report in detail: RELIANCE INDUSTRIES
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