21 June 2012
Update | Sector: Oil & Gas
Reliance Industries
BSE Sensex
17,033
S&P CNX
5,165
CMP: INR719
TP: INR760
Neutral
JV partner Niko cuts KG-D6 2P gas reserves by 80% to 1.9tcf
Additional investments contingent on gas price revision; cutting SOTP
by INR25/sh
Bloomberg
RIL IN
Equity Shares (m)
3,271.0
52-Week Range (INR) 906/674
1,6,12 Rel. Perf. (%) -2/-12/-12
M.Cap. (INR b)
2,351.8
M.Cap. (USD b)
41.7
Valuation summary (INR b)
Y/E March
2012 2013E 2014E
Net Sales
3,299 3,407 2,997
EBITDA
336 310 321
Net Profit
200 186 206
EPS (INR)
67.7 63.4 69.9
EPS Gr. (%)
-1.1 -6.2 10.2
BV/Sh. (INR) 560.7 612.1 670.6
P/E (x)
10.6 11.3 10.3
P/BV (x)
1.3
1.2
1.1
EV/EBITDA (x)
6.9
7.4
6.7
EV/Sales (x)
0.7
0.7
0.7
RoE (%)
13.0 11.0 11.1
RoCE (%)
12.1 11.0 11.3
Niko Resources, the E&P JV partner of Reliance Industries, in its 'Reserves and Contingent
Resources Update' has announced (1) reduction in KG-D6 2P gas reserves by 80% to
1.9tcf, and (2) its production guidance for next 7 years indicates decline in D1D3/MA
production and increase in new gas production from D6 satellites fields and NEC-25
block, resulting in gross production of 44mmscmd by FY19 (v/s current rate of
32mmscmd).
Niko stated that the reduced reserve estimates only pertain to the currently producing
D1D3/MA fields and does not include satellite field reserves. Further, it stated that
the additional capex will be contingent on gas price revision and government approval
for the development plan.
RIL's 1P reserve higher than Niko's new 2P reserve:
RIL does not give 2P reserve
numbers and only gives out 1P reserve number in its annual report. Post the
downgrade in FY12, RIL's 1P gas reserves were 104bcm (3.7tcf, net share number).
It should be noted that RIL's reserve numbers also include its share in PMT (RIL
stake at 30%). Even after adjusting PMT reserves (estimated), RIL's 1P reserve
number will still be higher than Niko's 2P reserve number of 1.9tcf.
Niko states that additional investments contingent on gas price revision:
Niko
stated that the new reserve estimates factor pertain only to the current producing
fields - D1D3/MA and additional investment decisions on development plans
(satellite and NEC) are contingent upon natural gas pricing (revision scheduled in
March 2014). Further, it stated that the reserve/production estimates by Ryder
Scott (independent reserve consultant) does not assume any additional drilling
in D1D3/MA fields, as Ryder Scott believes that no new wells will be required to
recover the revised 2P reserves in D1D3/MA fields in the KG-D6 block.
Key things to watch on RIL:
(1) Resolution of cost recovery issues with the
government, (2) DGH approvals for E&P program and update on KG-D6 ramp-up,
(3) Clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday), (4)
Margin trend in refining and petchem, (5) Developments on USD12b capex plan,
and (6) Update on BWA and retail foray.
Shareholding pattern % (Mar-12)
Others,
22.8
Foreign,
21.7
Domestic
Inst, 10.6
Promoter
44.9
Stock performance (1 year)
Cutting SOTP; Maintain Neutral:
We have cut our plateau production assumption
from 60mmscmd in FY18 to 40mmscmd and cut our overall recovery from 10 tcf to
~7tcf. However, our FY13 and FY14 estimates remain unchanged. Our revised SOTP-
based target price is INR760 (earlier INR785) as we cut our KG-D6 value to INR51/
share from earlier INR74/share and NEC-25 to INR13/share (earlier INR15/share).
We maintain Neutral due to concerns of (1) RoE slipping to sub-12% levels, (2)
falling KG-D6 volumes, and (3) increased share (75%) of cyclical refining and
petchem businesses. The stock trades at 11.3x FY13E adjusted EPS of INR63.4 and
7.4x FY13E EV/EBITDA.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Deepak Dult
(Deepak.Dult@MotilalOswal.com); +91 22 3982 5445
1

Reliance Industries
Key takeaways from the Niko's concall
Niko's reserves only from producing fields:
Niko's KG-D6 reserve numbers only
include reserves from producing D1/D3 and MA fields. Niko further says that it is
not sure of RIL's reserve composition given in RIL's FY12 annual report as it will
also include reserves from its other fields (RIL also has 30% stake in PMT fields
which currently produce ~15mmscmd gas). Every company and country has
different guidelines to categorize the reserves and Niko's reserves are based on
Canadian regulations.
Niko expects gas pricing to be market determined in India:
The likely March
2014 gas price increase to USD8/mmbtu from current USD4/mmbtu mentioned
in the Niko's press release is purely for the purpose to show sensitivity to its
NPV and is not its expectation of the likely price revision in March 2014. However,
Niko is in favor of market determined gas pricing as against the current practice
of getting the approval from Govt. of India.
No additional drilling required in D1/D3 & MA to recover current estimated
reserves:
Niko mentioned that the reserve estimates by Ryder Scott does not
assume any additional drilling in D1/D3 & MA fields, as it believes that no further
wells will be required to recover the revised proved and probable reserves in
D1/D3 and MA. In MA, JV has scheduled 1 more well.
Gas price hike critical for further capex:
Gas price increase will be critical before
committing further capex for integrated development plan for satellite fields.
Company is hopeful of government approvals for this development plan as it
will utilize the already built infrastructure at KG-D6 and will be cost effective.
Integrated development plan will be submitted in later part of current year.
Niko expects the capex at USD4b for integrated development plan.
Niko downgrades 2P gross reserve estimates by 80% to 1.9 tcf
Source: Company/MOSL
21 June 2012
2

Reliance Industries
Niko's reasoning for reserve downgrade
Niko has indicated that the part of the reserve change relates to production, but it
is largely attributable to field performance and revised geological model. The
reasoning is similar to that given by RIL during the recent downgrade.
a) Field performance at D1/D3 field during 2011 demonstrated higher than
expected pressure drawdowns resulting in material balance estimates to differ
from in place gas volumes derived from geologic mapping.
b) An assessment of reservoir performance concluded that contrary to the
previous geological model, the current D1/D3 producing wells did not appear
to be receiving any contribution from outside the main channel areas.
c) Enhanced inter-connectedness of the main channel sands has resulted in
increased water production and hence lowered the ultimate recovery.
Niko further stated that the revised geological model no longer anticipates
reservoir outside the main channel fairways.
Niko had reduced its India gas reserves from 13tcf in FY10 to 9.9 tcf in FY11 (gross for JV)
As at March 31, 2011
Natural Gas
Gross* (mmcf)
Net* (mmcf)
340,203
53,534
281,859
675,596
314,699
990,295
307,959
33,164
171,371
512,494
222,038
734,532
As at March 31, 2010
Natural Gas
Gross* (mmcf)
Net* (mmcf)
568,289
16
374,611
942,916
364,677
1,307,593
510,152
13
195,607
705,772
158,831
864,603
Reserves Category
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total proved
Probable
Total proved plus probable
Net number factor in the royalty impact/Profit Petroleum
* Represents Niko 10% stake in KG-D6
Source: Niko Resources/MOSL
Niko's production guidance much lower than RIL's AGM announcement
RIL announced in its FY12 AGM that it targets to produce 60mmscmd of domestic
gas on sustainable basis in next 3-4 years and expects to produce 30mmscmd of
additional gas through development of R-series/satellite fields in KG-D6 and NEC-
25 blocks.
While, Niko's production plan envisages production at just 18/21mmscmd in FY15/
16 and even seven years from now, i.e. FY19, it expects production to just touch
44mmscmd.
Niko's planned production v/s our current estimates (mmscmd)
* Our estimate does not include NEC
21 June 2012
Source: Niko, MOSL
3

Reliance Industries
RIL had downgraded 1P gas reserves by 7% in its FY12 annual report
RIL indicated that extensive reservoir studies are underway for augmenting
production along with BP's technical teams.
However, it has reduced proved gas reserve estimates by 7% based on production
data v/s original production geological model, validated by experts. The reserve
downgrade was partly compensated by D-34 discovery (not quantified), which
was declared to be commercial.
Proved reserves were further reduced to account for stake sale to BP. 1P gas
reserves have been reduced from 185.8bcm to 104bcm led by: (a) 56.6bcm
reduction for stake sale to BP, (b) 12.4bcm cut due to reservoir reassessment, and
(c) 12.8bcm cut led by production during the year.
Further, the reserve cut of 12.4bcm is for RIL's 60% stake and if we were to gross
up, the actual reserve cut would be ~10%. Key reasons for reserve downgrade
cited by RIL were:
a) Decline in pressure / production has been higher than originally predicted
b) Volumes connected to existing wells are lower than envisaged
c) Gas outside the main channel is in small uneconomic volumes and not
participating in production.
1P reserves decline due to reservoir reassessment (apart from production and third-party transfer)
Proved Reserves
FY10
FY11
FY12
As a % Restated
open. for 90%
bal.
stake
As a %
open.
bal.
Remarks
Crude Oil (mmt)
Opening Balance
Transfer of interest to BP
Addition/(deletion)
Production
Closing Balance
Natural Gas (bcm)
Opening Balance
Transfer of interest to BP
Addition/(deletion)
Production
Closing Balance
11.02
1.13
(1.04)
11.11
11.11
(1.44)
(1.38)
8.29
8.29
(1.69)
(2.61)
(0.93)
3.06
20.4
31.5
11.2
36.9
(3.92)
47.2
30% stake sale to BP
Deletion led by reassessment of the reservoir
Led by production during the year
Oil reserve life (based on 1P) has declined
from 6 years to 3 years
220.47
5.35
(14.61)
211.21
211.21
(5.77)
(19.62)
185.82
185.82
(56.62)
(12.42)
(12.82)
103.96
30.5
6.7
6.9
55.9
(18.63)
10.0
30% stake sale to BP
Deletion led by reassessment of the reservoir
Led by production during the year
Gas reserve life (based on 1P) has declined
from 9 years to 8 years
Crude Oil (mmt)
Opening Balance
4.97
8.62
Transfer of interest to BP
Addition/(deletion)
4.69
0.42
Production
(1.04)
(1.38)
Closing Balance
8.62
7.66
Natural Gas (bcm)
Opening Balance
133.89 130.82
Transfer of interest to BP
Addition/(deletion)
11.54
(3.84)
Production
(14.61) (19.62)
Closing Balance
130.82 107.36
*RIL sold 30% stake in 21 E&P blocks to BP
21 June 2012
7.66
(1.65)
(2.66)
(0.93)
2.42
107.36
(30.54)
(38.84)
(12.82)
25.16
21.5
34.7
12.1
31.6
(3.99)
52.1
30% stake sale to BP
Deletion led by reassessment of the reservoir
Led by production during the year
28.4
36.2
11.9
23.4
(58.25)
54.3
30% stake sale to BP
Deletion led by reassessment of the reservoir
Led by production during the year
Source: Company/MOSL
4

Reliance Industries
Status of RIL's key E&P blocks
Sl No
Name of the Block
Area (Sq. Km)
1-2
Panna - Mukta - Tapti
2,678
Pre-NELP
3
CB-ON-1
1,533
4
SR-OS-94/1
1,475
NELP - I
5
SR-OSN-97/1
5,040
6
NEC-OSN-97/2 (NEC-25)
10,755
7
KG-DWN-98/3 (KG-D6)
7,645
NELP - II
8
GS-OSN-2000/1
5,890
NELP - III
9
KK-DWN-2001/1
20,468
10
KK-DWN-2001/2
23,515
11
CY-DWN-2001/2
14,325
12
CY-PR-DWN-2001/3
8,600
NELP - V
13
KG-DWN-2003/1 (D3)
3,288
14
CB-ONN-2003/1
635
NELP - VI
15
KG-DWN-2004/4
11,904
16
KG-DWN-2004/7
11,856
17
MN-DWN-2004/1
9,885
18
MN-DWN-2004/2
11,813
19
MN-DWN-2004/3
11,316
20
MN-DWN-2004/4
8,822
21
MN-DWN-2004/5
10,454
NELP - VII
22
KG-DWN-2005/2
1,949
Total Domestic
183,846
Status of key blocks
Under production
Likely to be relinquished
Likely to be relinquished
Likely to be relinquished
Awaiting govt. approval for development plan
Under production
Expect to submit FDP for 1 gas discovery
Relinquished
DGH has granted 6-month extension for Ph-1
Submitted DoC for one discovery
Appraisal program for one discovery submitted
4 gas discoveries; To drill 2 more wells by 1HCY13
8 oil discoveries; no immediate further plans
At
At
At
At
At
At
At
exploratory
exploratory
exploratory
exploratory
exploratory
exploratory
exploratory
stage
stage
stage
stage
stage
stage
stage
At exploratory stage
Source: Company/MOSL
Niko expects the integrated development
plan to be submitted by end-2012
Niko expects NEC-25 production to commence in FY19
Source: Niko Resources
21 June 2012
5

Reliance Industries
Valuation and view
Our assumptions for RIL:
1) Average gas production of 28/22mmscmd for FY13/14; 2)
Well-head gas price of USD4.2/mmbtu; 3) Tax holiday on KG-D6 gas profits; and 4)
Blended GRM of USD8.3/bbl in FY13 and USD9/bbl in FY14.
Key things to watch
would be 1) Resolution of cost recovery issues with govt. and DGH
approvals for its E&P program and update on its KG-D6 ramp-up, 2) clarity on 7-year
income tax holiday for KG-D6 gas (we model tax holiday); 3) margin trend in refining
and petchem, 4) developments on it USD12b capex plan and 5) update on its BWA and
retail foray.
Cutting SOTP; Maintain Neutral:
We have cut our plateau production assumption from
60mmscmd in FY18 to 40mmscmd and cut our overall recovery from 10 tcf to ~7tcf.
However, our FY13 and FY14 estimates remain unchanged. Our revised SOTP-based
target price is INR760 (earlier INR785) as we cut our KG-D6 value to INR51/share from
earlier INR74/share and NEC-25 to INR13/share (earlier INR15/share). We maintain
Neutral due to concerns of (1) RoE slipping to sub-12% levels, (2) falling KG-D6 volumes,
and (3) increased share (75%) of cyclical refining and petchem businesses. The stock
trades at 11.3x FY13E adjusted EPS of INR63.4 and 7.4x FY13E EV/EBITDA
Segmental EBIT break-up
Segmental EBIT (INRb)
Refining
Petrochemicals
E&P
Total
Segmental EBIT share (%)
Refining
Petchem
E&P
Total
FY09
96
69
23
188
51
37
12
100
FY10
60
86
55
200
30
43
27
100
FY11
92
93
67
252
36
37
27
100
FY12
97
90
53
239
40
38
22
100
FY13E
94
89
32
215
FY14E
102
103
28
233
44
44
41
44
15
12
100
100
Source: Company/MOSL
RIL: Key Assumptions
Key Metrics
FY09
FY10
47.5
62.0
60.6
98
6.9
3.6
3.3
39.8
10.7
69.7
4.2
FY11
45.6
62.0
66.5
107
8.7
5.2
3.5
56.2
18.9
86.5
4.2
FY12
47.9
62.0
67.6
109
8.4
8.3
0.1
42.6
13.8
FY13E
50.0
62.0
67.7
109
8.3
8.2
0.1
28.0
11.0
FY14E
48.1
62.0
66.4
107
9.0
8.2
0.8
22.0
11.0
Exchange Rate (INR/USD)
45.8
Refining
Capacity (mmt)
33.0
Production (mmt)
32.0
Capacity Utilization (%)
97
GRM (USD/bbl)
Blended GRM
12.3
Singapore GRM
5.8
Premuim to Singapore
6.5
E&P
Gas Production (mmscmd)
Oil Production (kbd)
Pricing
Brent Oil (USD/bbl)
84.8
Wellhead Gas Price (USD/mmbtu)
114.5
110.0
100.0
4.2
4.2
4.2
Source: Company/MOSL
6
21 June 2012

Reliance Industries
Reliance: Sum of parts valuation
Business
USD b
Core business:
28
Refining
15
Petchem
13
E&P Initiatives
8
KG - D6 Gas (KG Basin) 2
KG - D6 MA1 Oil
(KG Basin)
NEC - 25
(Mahanadi basin)
KG-DWN-2003/1 (D3)
per Hardy; RIL (60%)
Sohagpur
East & West (CBM)
Block - 9 (Yemen)
0
1
INR b
1,504
803
701
450
127
26
38
Adj. INR/sh
508
271
237
152
43
9
13
Remarks/Methodology
Core business EV @6x FY13E EBITDA
EV @6.5x FY13E EBITDA
DCF; 60% stake; Plateau of 40mmscmd
in FY18; 6.5TCF recovery
DCF; 60% stake; 47mmbbls
recovery; (LT Brent - USD90/bbl)
DCF; 60% stake; OGIP of 3.7 TCF;
Production in 2019
Prospective resources of 695mmboe as
DCF; 100% stake; OGIP of 3.65 TCF,
assumed 50% recovery
Currently producing. 2P reserves of 330
mmbbls valued, assumed 50% recovery
valued at @USD20/bbl; RIL stake 25%
Currently producing.
EV @4.5x FY13E EBITDA
JV with Atlas, Pioneer & Carrizo; valued
at cash investment
Includes RGTIL, RIIL and SEZ
At book value and
20% discount to estimated book value
BWA Foray
Valud at 0.75x equity investment
100% subsidiary of RIL; 0.75x equity
investments
FY13E
Based on fully diluted equity shares of
2,962m (excl 309m treasury shares)
Source: Company/MOSL
1
1
1
34
31
40
11
10
14
PMT
Investment in
Shale Gas
Investments
RGTIL, RIIL
fuel Retailing
BWA
SEZ
Reliance Retail
Less: Net Debt
Total Base Value
2
1
3
0
1
1
1
1
-2
42
99
51
136
24
32
48
32
63
-98
2,252
33
17
46
8
11
16
11
21
-33
760
21 June 2012
7

Reliance Industries
Financials and Valuation
Income Statement
Y/E March
Net Sales
Change (%)
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate* (%)
PAT
Adj. PAT
Change (%)
Key Operating Metrics
GRM (USD/bbl)
KG-D6 production (mmscmd)
2009
1,418
6.3
233
16.4
52
17
21
184
31
16.9
153
156
2.3
12.3
0.0
2010
1,925
35.7
306
15.9
105
20
25
205
43
21.0
162
162
4.0
6.9
39.8
2011
2,482
28.9
381
15.4
136
23
31
252
50
19.6
203
203
24.9
8.7
56.2
2012
3,299
32.9
336
10.2
114
27
62
258
57
22.2
200
200
-1.2
8.4
42.6
(INR Billion)
2013E
3,407
3.3
310
9.1
101
29
66
245
59
24.1
186
186
-7.0
8.3
28.0
2014E
2,997
-12.1
321
10.7
95
29
76
273
67
24.6
206
206
10.3
9.0
22.0
Balance Sheet
Y/E March
Share Cap. (incl sh. Susp.)
Reserves
Net Worth
Total Loans
Deferred Tax
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L & Adv.
Inventory
Debtors
Cash & Bank Balance
Loans&Adv.and Other CA
Current Liab. & Prov.
Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2009
31
1232
1,264
739
97
2,100
1496
493
1,003
690
216
2010
33
1339
1,372
625
109
2,106
2159
626
1,533
121
232
2011
33
1483
1,515
674
116
2,305
2213
785
1,427
128
377
2012
33
1628
1,661
684
121
2,466
2055
918
1,137
78
540
(INR Billion)
2013E
32
1765
1,798
682
126
2,606
2106
1019
1,088
112
580
2014E
32
1939
1,971
679
132
2,782
2166
1114
1,053
169
620
148
46
222
131
270
117
135
103
298
174
271
171
360
184
396
257
374
183
417
264
327
161
552
272
327
30
190
2,100
368
36
220
2,106
497
46
373
2,305
442
43
712
2,466
365
46
826
2,606
321
49
941
2,782
21 June 2012
8

Reliance Industries
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Adj. EPS (ex Treasury)
Cash EPS
Adj. Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Adj. P/E
Cash P/E
EV / EBITDA
EV / Sales
Adj. Price / Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (No. of Days)
Fixed Asset Turnover (x)
Leverage Ratio
Net Debt / Equity (x)
2009
52.6
58.7
69.1
475.5
6.5
14.5
2010
49.6
54.8
81.7
463.2
7.0
15.0
2011
62.0
68.4
103.5
511.2
8.0
13.7
2012
61.3
67.7
96.1
560.7
8.5
14.7
2013E
57.4
63.4
88.6
612.1
8.5
17.3
2014E
63.3
69.9
92.5
670.6
9.0
16.6
11.6
10.5
6.9
6.8
1.0
1.4
1.1
11.7
10.6
7.5
6.9
0.7
1.3
1.2
12.5
11.3
8.1
7.4
0.7
1.2
1.2
11.4
10.3
7.8
6.7
0.7
1.1
1.3
15.7
12.5
13.4
11.3
14.8
12.9
13.0
12.1
11.0
11.0
11.1
11.3
14
1.1
0.4
15
1.1
0.3
21
1.1
0.2
20
1.5
0.0
20
1.6
0.0
21
1.4
-0.1
Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest /Other Income
Direct Taxes Paid
(Inc)/Dec in Wkg. Capital
Other op activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Investments
Other In activities
CF from Inv. Activity
Change in Equity
Inc / (Dec) in Debt
Dividends Paid
CF from Fin. Activity
Inc / ( Dec) in Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
21 June 2012
2009
184
72
2
-19
-38
-19
182
-247
24
-18
-241
152
105
-19
237
179
43
222
2010
205
135
-1
-31
-53
-50
205
-218
-12
48
-182
1
-88
-22
-110
-87
222
135
2011
252
162
-3
-42
1
-38
333
-121
-141
59
-203
2
30
-24
7
137
135
271
2012
258
137
-17
-48
-28
-32
270
-80
62
-12
-30
-2
-85
-28
-115
125
271
396
(INR Billion)
2013E
245
101
-37
-54
-93
0
163
-86
-40
66
-60
-20
-32
-29
-81
21
396
417
2014E
273
95
-47
-62
20
0
279
-116
-40
76
-80
0
-31
-32
-64
135
417
552
9

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