RIL-BP deal a positive, however, analysts suspect RIL's acquisition move.
Even when analysts are bullish over the government's approval for the RIL-BP deal, they are seriously concerned over RIL's exploration and production (E&P) activities owing to a lack of clarity on D-6 production ramp-up and slow progress in exploration acreage. Declining KG-D6 gas production now at 48.6 million metric standard cubic metre per day (mmscmd)remains the key headwind for RIL.
RIL, which announced its Q1 results on Monday, has indicated that production ramp-up at D-6 may materialise only by end FY14 only after it crosses regulatory hurdles as the directorate of general of hydrocarbons is still insisting on a more aggressive drilling schedule. JP Morgan in its analysis said RIL continues to engage with the government on D6. The regulatory scrutiny has impacted decision-making and plans on further drilling, workovers had not yet been finalised and approved.
Edleweiss in its report said: "We have reduced our FY12E and FY13E gas production to 47 mmscmd and 46 mmscmd [against 52 mmscmd and 65 mmscmd earlier], respectively. We expect the JV to come up with a new capex plan to drill more wells probably by FY12-end. Given that the drilling fair weather window is between December and May, we believe that earliest gas production scale-up may happen only in FY15. We now forecast FY12 and FY13 volumes from KG-D6 to average 47 mmscmd and 46 mmscmd in FY12E and FY13E (earlier 52 mmscmd and 65 mmscmd), respectively."
Hence, the key question is ‘when’ and not ‘if’ production will start to increase again. Though BP has deployed its best team to help resolve production issues, the BP-RIL-Niko JV is expected to reinterpret the field data and get back to DGH on the way forward.
Citigroup belives that while further clarity on ramp-up of KG gas is still awaited, the deal with BP is nevertheless a positive as it should ratify RIL’s capex in KG-D6 and should eventually provide clarity on production ramp-up. A 20% premium to NAV of known reserves looks justified for the E&P business given new discoveries, access to BP's technology, and stakes in several prospective deepwater blocks. In addition, gas prices are set to structurally rise in India, as exemplified by higher prices approved by the government for production from new fields by a large upstream PSU. Any willingness on the part of the government to increase KG gas price (which, along with APM gas, is now the cheapest in the country) would be a positive surprise.
With the core refining and petrochemicals businesses gaining momentum, we believe that risks on slower KG ramp-up could be partly offset. "Further delays in the ramp-up of production of KG-D6 gas; delays in the drilling programme and/or negative news-flow for the other blocks (D9, D3, MN-D4); charges against RIL pertaining to a 2007 case regarding insider trading in shares of RPL (an erstwhile subsidiary) could impact stock sentiment," Citigroup said in its report.
According to Macquaire, RIL has commenced upstream work with BP, even prior to government approval. The 2 blocks that were not approved by the government shall reduce BP's acquisition price of $7.2 billion. Delayed government approvals for declaring commerciality in R1 region of KGD6 and NEC 25 has delayed further ramp-up.
Further, Nomura said the last week’s government approval of BP deal for 21 of 23 blocks (BP will take 30% stake in these blocks), was a clearly positive step. "However, the progress on agreement with government/DGH for ramp-up plans in KG-D6 block, as well as work plans in other blocks, continues to remain slow. RIL indicated that in addition to two development wells already completed, it has recently completed another development well (SB-1). It may also take up work on two more development wells soon. But, these five wells (or any further wells if needed) would need to be developed as a separate cluster, with significant work required in sub-sea infrastructure. For such work to commence, the approval of government/DGH would be required. And, even if such approvals were to come by soon, the entire work-program could take over 2 years. Thus, any meaningful increase in production may be 2 to 3 years away," it added.
However, Bernstein in its research report observed that RIL results were over shadowed by the approval of BP's farm-in to Reliance's Indian E&P acreage.
"With BP's exploration track record and deep water operating experience, we believe this as strongly positive for Reliance. The announcement of further discoveries in D9 and CY-D6 continues to confirm the potential of India's deep water acreage. Once the deal is finally approved we estimate that Reliance will be sitting on a cash pile of $15 billion. This big question for investors is what will Mukesh Ambani do next? We suspect that Reliance may be considering an overseas upstream (oil) acquisition which will continue to take Reliance along the path of vertical integration. While there is a risk over overpaying, Reliance have shown they can be patient and value orientated when it comes to M&A," it said.
