Jun 16, 2017 12:16 PM IST | Source:

Focus on KG-D6 discoveries a long-term positive but Jio key in medium term: Analysts

Reliance Industries has 60 percent participating interest in KG-D6 block while BP has 30 percent and Niko 10 percent.

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Global brokerage houses said the partnership between Reliance Industries and British Petroleum (BP) to develop discoveries in the KG-D6 block is a long term positive for RIL but revenue from Reliance Jio would be key in near-to-medium term. The stock recouped early losses to trade at Rs 1,385.75, up 0.09 percent from previous close, at 11:44 hours IST.

RIL and BP on Thursday announced that they are moving forward to develop already-discovered deepwater gas fields, bringing new gas production for India. Both companies will award contracts to progress development of the 'R-series' deep water gas fields in block KG-D6 off the east coast of India.

The project is expected to produce up to 12 million cubic metres of gas a day, coming to stream in 2020, the company said, adding development of three projects, with total investment of Rs 40,000 crore, is expected to bring in total 30-35 million cubic metres of gas a day new domestic gas production onstream, phased over 2020-2022.

Reliance Industries has 60 percent participating interest in KG-D6 block while BP has 30 percent and Niko 10 percent.

CLSA | Rating Buy | Target Rs 1,710

The partnership has also been expanded beyond upstream to focus on fuel marketing, unconventional energy and new technology initiatives, to deliver value to customers.

The two companies also advanced their collaboration beyond conventional upstream. Firstly, this venture will expand in conventional fuel and ATF marketing. Pertinently, BP already has a licence to market aviation turbine fuel and set up 3,500 fuel stations in India. Secondly, the partnership plans to also look at opportunities in unconventional fuels and low carbon energy sources. This should encompass solar, wind and gas amongst other things. Thirdly, the JV will look to employ digitisation and develop futuristic and innovative solutions to deliver disruptive value, which can also be taken to other parts of the world.

Plan to develop existing discoveries in D6 is a long-term positive. At the same time, this new JV on downstream should remove any doubts on whether Reliance is focussed to expand in fuel marketing. Nonetheless, near-term stock performance will be driven by start of projects worth over USD 40 billion in the next 6-9 months. CLSA has reiterated buy call on the stock.

Morgan Stanley | Rating Overweight | Target Rs 1,506

RIL's announcement related to investment in upstream, which was slightly above expectations, while the collaboration with BP in expanding investment in conventional fuels, unconventional mobility solutions and addressing electrification, sets the tone for RIL's growth plans.

Both upstream and fuel retail expansion have been well flagged; the overall growth in capex being around 10 percent above estimates. While there were limited details on retail fuel collaboration, BP has adopted a selective approach towards retail network expansion and it believes it will co-exist and not compete with incumbent retailers.

Bank of America Merrill Lynch | Rating Neutral | Target Rs 1,450

While it is good that RIL has decided to restart projects in D6, these are currently long dated projects.

The new D6 fields could add USD 1.3 billion (2 percent) to RIL sum-of-the-parts, but more importantly drive core earnings growth post the ongoing chemical projects (in the FY21-22 period).

The new energy partnership is still in early stages and needs definition. Spending, inflow on this will take time.

In the near term, the RIL stock should depend on Reliance Jio's revenue fortunes, which may become clear only around September/December 2017. With 5 percent upside potential, it stayed neutral on the stock.

JPMorgan | Rating Neutral | Target Rs 1,310

Given that both announcements are more medium-term impact events, JPMorgan sees limited uplift to the near-term stock price.

Given that the first of the incremental gas is not before 2020 and the full ramp up would be only in 2022, the research house sees limited financial impact till FY20.

The capital spend of around USD 1 billion a year is also very manageable for RIL, it feels. The increase in KG-D6 investments comes together with increasing CBM investments by the company.

While current gas prices are low, so are capital costs for developing these fields. RIL's ability to make counter cyclical investments is a key positive as it continues to de-risk the earnings profile from energy prices, JPMorgan said.

Credit Suisse | Rating Neutral

RIL/BP's a new strategic partnership, aiming to explore opportunities in differentiated fuels, mobility and low carbon businesses, is very preliminary. Credit Suisse does not see it impacting its RIL investment thesis at the moment.

Capex, project timelines and peak output are broadly in line with prior RIL/BP guidance and already built into its models. Domestic E&P only accounts for 4 percent of its RIL sum-of-the-parts.

Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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