1. Reliance Industries rated ‘Add’ over plans with BP by Kotak

Reliance Industries rated ‘Add’ over plans with BP by Kotak

The plans with BP are steps in the right direction to utilise expected free cash flows; more progress needed before event can be incorporated for company.

By: | Published: June 26, 2017 4:39 AM
Reliance Industries, Reliance industries' plans, Reliance industries investment, Reliance industries investment plan, BPCL, HPCL, IOCL We await further progress before incorporating these developments for RIL, while retaining our Add rating on the stock.

Reliance industries’ plans with BP to (1) invest $6 billion for developing 3 tcf of discovered gas resources in KG D-6 block and (2) explore options to partner in downstream fuel retailing and other new opportunities in the energy value chain, are steps in the right direction to utilise expected free cash flows post completion of ongoing capex cycle. The former will be positive for domestic gas value chain, while the latter, if it shapes up, could pose risks to the marketing profitability of PSU OMCs in the medium term. As regards the increase in gas output, we see limited upside to our SoTP, which already assumes 2 tcf of incremental reserves monetisation beyond 2020.We await further progress before incorporating these developments for RIL, while retaining our Add rating on the stock.

$6 billion investments to develop 3 tcf of gas resources, producing 30-35 mcm/d by 2022 RIL and BP have proposed to invest $6 billion for developing 3 tcf of discovered gas resources in KG D-6 block, indicating a target to produce 30-35 mcm/d of incremental new gas, in phases over CY2020-22. The companies will award contracts to initiate development of dry gas discoveries in R-Series (D-34) fields, which are expected to come on-stream by CY2020 and produce up to 12 mcm/d of natural gas. RIL-BP will also submit development plans for two other projects in KG D-6 block by end-CY2017, which will be developed subsequently by CY2022 to increase overall new gas production to 30-35 mcm/d, subject to necessary approvals by the government and upstream regulator. While this is a positive step, we see limited upside to our SoTP, which already assumes 2 tcf of incremental reserves monetisation beyond 2020.

To explore collaboration in fuel retailing and other new opportunities in the energy value chain Reliance Industries and and BP jointly indicated intent to expand their strategic collaboration in the downstream business as well, including retailing of conventional transportation and aviation fuels, without specifying any concrete agreement or rollout timelines, as yet. The two companies also indicated plans to explore upcoming opportunities in the expanding Indian energy sector, including development of differentiated fuels, unconventional mobility solutions, low carbon energy and other such businesses with an objective to address electrification, digitisation and disruptive mobility needs of end-consumers across the spectrum.

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Domestic production may boost gas value chain; retail focus could be negative for PSU OMCs Potential increase in domestic gas production, if realised, will be a positive for under-utilised gas value chain including pipelines (GAIL and GSPL) and end consumers such as CGD, fertiliser and power sectors in the long run. We are not too perturbed by the viability of existing long-term LNG contracts as yet, given the government’s stated objective of doubling the share of gas in India’s primary energy mix, which will require adoption of policies to effectively utilise domestic gas and imported LNG alike.

On the other hand, any scale-up of RIL’s fuel retailing business, with or without BP, could pose risks to marketing volumes as well as margins for PSU OMCs (BPCL, HPCL, IOCL) in the medium term—a concern we have been highlighting for a while. On a separate note, implementation of daily fuel pricing is actually an enabler for private players to expand their presence in the fuel marketing business, given unlikely policy interventions in domestic pricing of auto fuels henceforth on volatility in global crude/product prices.

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