Mumbai, Aug. 25: The tide seems to be turning for Reliance Industries Ltd’s (RIL) exploration and production (E&P) business, which has remained under pressure for the past few months.
A host of foreign brokerages maintain that the E&P business of the Mukesh D. Ambani flagship is in the process of being re-rated. They believe that the output from the KG-D6 block off the Andhra coast is set to improve over the next couple of years because of the upgradation of reserves and well workovers. The Directorate General of Hydrocarbon’s (DGH) approval to a pending pipeline is also likely to boost production.
The KG-D6 block has seen output falling to around 14 million standard cubic metres per day (mmscmd) from a peak of over 60mmscmd in 2010 because of water and sand ingress.
Reliance is likely to benefit from a decision by the government to change gas pricing norms from the next fiscal. Based on rates at some global hubs, the new norm is expected to raise the price of gas from $4.2 per million British thermal unit.
On Friday, RIL had announced a second gas condensate discovery in the Cauvery basin. This was the second major E&P success this year, following the large gas find underneath the currently producing D1 & D3 fields in the KG-D6 block off the east coast in May.
For RIL, the latest discovery is the second such find after July 2007 in the Cauvery basin. However, the company is yet to get DGH’s approval for the discovery.
“Now, with two discoveries in the CY-D5 block and the potential doubling of gas prices from 2014-15, we believe the DGH approval for declaration of commerciality can be a reality and could add to RIL’s reserves and production over the long term. This discovery further strengthens our view that the company’s E&P business is turning around. We, however, believe that the market is hardly pricing in this continued E&P rerating for RIL,” Nilesh Banerjee and Vikas S. Jain, analysts at Goldman Sachs, said in a note.
RIL’s share prices have remained subdued over the past few days because of an overall weakness in the markets and worries that the proposed hike in price may not go through.
Recently, a parliamentary standing committee on finance, headed by BJP leader Yashwant Sinha, had asked for a comprehensive review of the decision. In July, the Supreme Court had admitted a public interest litigation challenging the proposal.
However, UBS analyst Ashish Jagnani maintains that oil minister Veerappa Moily has made the rationale behind the hike clear by stating that it is necessary for new field development. The fact that the price increase will be applicable to all gas producers, including PSUs such as ONGC, goes to indicate that an adverse impact on RIL alone is unlikely.
Sujit Lodha of Batlivala & Karani said production of the block would stabilise in this fiscal and would witness an uptick from 2014-15. Besides, the expected hike in price will benefit Reliance.