The media reports that the CBI has begun investigating possible dealing between Indian energy companies and the oil ministry. This could result in a freezing of bureaucratic decision-making, which would hamper RIL?s ability to carry out E&P activities effectively in its blocks. We downgrade to neutral and lower our Sotp (sum of the parts) based target price to R1,040 from R1,084 on concerns about slower progress in oil & gas and lowering of exploration upside.
On June 14, the media reported that CBI has started an enquiry into the oil ministry?s dealings with private sector energy companies. We believe that this could result in a sudden freeze of government decision-making particularly related to production sharing contracts for oil & gas blocks despite the fact that such approvals are critical for effective operations. The state auditor recently published the Comptroller and Auditor General draft report, mentioning gold plating by RIL in developing the KG-D6 gas field, may also act as a negative catalyst. We fear the standoff could linger due to the raging 2G controversy.
We maintain the regional refining margins at $6 and $6.5 for FY12e and FY13e. but we also expect a 2% reduction in petrochemical margins from the highs of Q4FY11 for poly ethylene and c20% for polyesters, in line with forecasts by CMAI. We believe that exploration upside from the E&P blocks are at risk due to: first, it being the slower work in various blocks and second, given the lowering of gross reserve estimates by the JV partner of RIL.
We continue to value the E&P business on a Dcf ( discounted cash flow) for producing properties, on reserve multiples for discovered fields, on the average of EV/Ebitda and PE for the refining & petrochemical business and investments at book value. We are lowering upside from the E&P fields, to reflect RIL?s JV partner, NIKO, recent decrease to gross reserves from its India operations. As a result, out TP falls to R1,040 from R1,084. There could be upside and downside risk to our estimates if the refining and petrochemical margins, production ramp-up from the D6 block and rates are different from our assumptions. A $1/barrel change in refining margin would affect our valuation by R70/share.
?HSBC