>RELIANCE INDUSTRIES (MERRILL LYNCH)

■ First exploration well in KG D9 dry; retain Underperform: The first exploration well in the KG D9 block of Reliance Industries (RIL) has been abandoned due to poor results. The KG D9 block is believed to be one of the most prospective exploration blocks of RIL. On the basis of just one dry well one cannot conclude that KG D9 would not see large reserve accretion. However, the dry well is a setback. Investors may less aggressively value exploration upside after the KG D9 dry well. Our PO includes exploration upside of Rs419 with KG D9 at Rs210 being 50% of it. RIL’s shares factor in even higher exploration upside of Rs679 in our view. We reiterate Underperform on RIL.

Disappointment in first well drilled in KG D9

■ Large reserves in D9 still possible but potential may be cut: Hardy Oil has indicated that it may revise reserve potential in KG D9 after the first dry well. Risked prospective gas resources in KG D9 were estimated at 10.8tcf in May 2009. The risked prospective resources in lower and Middle Miocene play targeted by first well were 8tch with that in the largest prospect (it may have been first drilled) being 1.65tcf. One dry well may mean nothing. Large reserves may still be found in KG D9. Note that even in RIL’s Kg D6 block, which has 3.6bn boe of 2p reserves and resources, 10 of the 28 wells drilled were dry. At least three more exploration wells are planned in KG D9. Earlier guidance was of nest well in 2H 2010E.

■ Less aggressive exploration upside after KG D9 dry well?: In our view, RIL’s stock currently prices in 11.6bn boe of reserves, which is 2.5x its 2P reserves of 4.7bn boe. Its shares factor in US$20.9bn (Rs679/share) of exploration upside, in our view (see Table 4). After the dry well in KG D9, investors may less aggressively value exploration upside in RIL.

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