CMP Rs883, Target Rs1,091, Upside 23.6%
Reliance Industries Ltd (RIL) reported GRMs of US$10.3/bbl in Q1 FY12 as against US$9.2/bbl in Q4 FY11 and US$7.3/bbl Q1 FY11. The GRMs were tad lower than our estimates of US$10.5/bbl. During the quarter, RIL’s GRMs were 1.2x benchmark Singapore GRMs as against 2x in Q1 FY11. This was a despite a strong environment for GRMs. The company attributed the fall to the following 1) higher intake of imported LNG as availability of off-gases as well as KG-D6 gas decreased during the quarter, 2) widening spread of Brent over WTI and 3) lower prices of solid products such as Sulphur and Petcoke. The two refineries processed 17mn tons of crude as against 16.7mn tons in Q4 FY11 and 16.9mn tons in Q1 FY11. Revenue for the segment jumped 46% on yoy basis due to better realizations. EBIT margins for the segment were at 4.3% v/s 4% in Q1 FY11 on account of better GRMs.
During Q1 FY12, petrochemical segment revenues rose by 32% yoy. The growth was primarily on account of higher volumes. Realizations remained flat on yoy basis but fell sequentially as domestic demand scenario weakened in the quarter. EBIT margins for the segment fell 271bps yoy and 237bps qoq. The fall was due to fall in polymer deltas as the demand – supply balance remains in favor of supply with strong capacity adds in the Middle East. Furthermore, the chemical chain, which was witnessing a robust trend until Q4 FY11, witnessed some pressure during the quarter.
Outlook for petrochemical segment
Following strong recovery in demand from India and China product prices have witnessed a substantial rise. However, capacity addition is expected to surpass incremental demand in the near term. The new capacities are based on low cost gas, which will further put pressure on margins. Closure of select plants in Japan and Europe would provide some support to the falling spreads. The polyester chain would continue to be better off with prevailing high prices of cotton on back of declining acreage in domestic market. Integrated players such as RIL would continue to post a relatively better performance.
Uncertainty has emerged over the future quantity of gas production at KG-D6 field over the past few months. The current level of production is about 50mmscmd as against peak rate achieved of about 60mmscmd. For the next couple of years we are forecasting the production to be at 50mmscmd and 52mmscmd. In case that level extends for another couple of years, our NPV value will be trimmed by Rs10/share. Bureaucratic issues could further impact the sentiment. On the international asset front though, things are going as per schedule with regards to the three shale gas ventures.
Production at the Panna-Mukta fields are back to the previous year levels but Tapti field continues to witness natural decline.
Other highlights for the E&P segment
During the quarter, total gas production was 156bcf (JV Share) in comparison to 192bcf in Q1 FY11 and 162bcf in Q4 FY11
During the quarter, crude oil production was 1.4mn barrels (JV share) as against 2.4mn barrels in Q1 FY11 and 1.5mn barrels in Q4 FY11
Update on shale gas assets
Chevron JV (prior Atlas JV)
3 horizontal rigs and 1 Frac crew in operation
22 producing wells with gross exit production rate ~ 51 MMscfd at JV level
RIL’s share of production at ~1.6Bcfe in Q1 FY12
The company has a conservative drilling schedule and is ramping up cautiously in view of the prevailing gas price environment and availability of take-away capacity
US$82mn of additional capex (incl. carry) in Q1 FY12; cumulative investment of over US$689mn till date
Continuous 2 rig drilling program in Northeast PA
Pipeline construction progressing to support first sales
Initial 10 well program in C-Counties commencing in Sept ’11
US$32mn of additional capex (incl. carry) during Q1 FY12; Cumulative investment of over US$402mn
2 additional rigs mobilized during the quarter; 12 rigs currently in operation 70 wells drilled so far with addition of 20 wells during Q1 FY12
42 wells producing currently; 18 wells put on production during Q1 FY12
Gross JV exit production rate ~165 MMscfepd, including ~13,800 Bpd of condensate
Reliance’s share of production at ~5.05 Bcfe in Q1 FY12
Midstream JV progressing on plan – 5 CGPs commissioned, with the 6th expected soon
Additional capex of US$286mn in Q1 FY12; cumulative investment of over US$1,074mn till date in both upstream and midstream JV
Higher available cash balance drives up other income
For Q1 FY12, RIL reported 20.3% yoy jump in PBT as compared to 6.3% yoy rise in operating profit. The performance was better at the PBT level on account of 49% yoy jump in other income as cash balance was at Rs458bn at end of Q1 FY12 as compared to Rs264bn at end of Q1 FY11. Additionally, higher interest rates have resulted in better yields.
Deployment of cash and developments on E&P assets will be keenly watched
Going ahead, while refining segment will witness a stronger environment, petchem segment will see pressure on spreads in the near term. For RIL, as complex nature of its refinery will allow it to gain further, integrated nature of its petrochemical operations will lead to a relative better performance. Utilization of Rs458bn worth of cash on the balance sheet would be keenly watched. With the company in consultation with the government on key issues with respect to their E&P portfolio, any positive development would provide additional kicker. We maintain BUY with a 9-month price target of Rs1,175.