Macquarie’s oil economist, Jan Stuart, has revised down our oil price forecasts, with FY3/10 and FY3/11 down 19% and 6%, respectively. The impact is negligible, as Reliance’s (RIL) upstream business comprises mainly gas priced at $25/bbl.
We cut our forecasts for FY10, FY11 and FY12 by $13/bbl, $4.5/bbl and $12/bbl, respectively. The WTI average is now $54.5/bbl for FY10, $77/bbl for FY11 and $81/bbl for FY12. We still forecast FY09 as the peak year for oil prices.
RIL has sought approval from the Directorate General of Hydrocarbons (DGH) to develop nine additional wells in the KG-D6 block. If approved, gas production will rise by 50% and it will incur additional capex of US$5.5bn in KG-D6.
Since the production-sharing contract for KG-D6 allows full cost recovery, the higher capex will defer the government’s higher profit share. This enhances net value to RIL by 25%.
We value RIL’s other E&P blocks, primarily NEC-25, CBM Sohagpur and KG-D9, based on EV/reserve multiples for its Indian peer, Oil and Natural Gas Corporation.
The multiple has increased sharply in the past one month due to a ~30% rally in ONGC stock. We upgraded the value of these blocks on the back of this. We also factored in a higher value for RIL’s treasury stocks, in line with current market prices.
RIL’s oil production is restricted to the Panna and Mukta fields, while commercial oil production from KG-D6 is expected to start in the next few months.
We downgrade our FY10E earnings by 10% primarily due to the delay to the start of the commercial commissioning of Reliance Petroleum refinery.
We raise our target price by 22% to Rs2,035 on higher upstream potential and higher benchmark valuations.