Falling gas prices to hit RIL's E&P business

Analysts put zero enterprise value to exploration and production, shale gas, and telecom businesses

With the government lowering gas prices from April, Reliance Industries Ltd (RIL) will have to wait longer for a turnaround in its exploration and production (E&P) business. According to analysts, the current stock price of the company reflects zero enterprise value for its E&P, shale gas, and telecom businesses. They do not see any turnaround in these businesses in the near term.

Enterprise value is calculated as the market capitalisation plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

On Wednesday, RIL’s shares closed at Rs 834 apiece. The stock has lost 11 per cent or Rs 31,000 crore of market value in FY15, as the company fought the Indian government over gas prices and capital-expenditure recovery. The Krishna-Godavari basin’s D6 gas fields’ volumes are currently at 11 million standard cubic metres a day (msmcd). These will continue to decline, said analysts.

A questionnaire to RIL on the E&P business did not get a response. Analysts at Morgan Stanley said the company’s domestic E&P was becoming inconsequential to its earnings, as it was entangled in an expensive arbitration with the government on the gas price. The government’s move to reduce gas prices by eight per cent from April, after a sharp fall in oil and imported liquefied natural gas (LNG) prices, will hit the firm’s plans to revive its E&P business.

While the government has reduced gas prices to $4.66 a unit from April, RIL is still getting $4.2 a unit for gas produced at its D6 gas fields. Depending on the outcome of the arbitration, RIL will get, or not get, the money now deposited in a pool account.

Lack of gas from the D6 fields has not only hit a slew of power companies across India, it has also affected Reliance Gas Transportation Infrastructure Ltd (RGTIL),  owned by Mukesh Ambani personally. The pipeline company transports gas from the Andhra Pradesh coast to Gujarat.  During FY14, RGTIL reported a loss after tax of Rs 3,402 crore on a total income of Rs 1,452 crore, compared with a net loss of Rs 911 crore on a total income of Rs 4,043 crore during FY13. The losses of the company will increase in FY15.

According to Morgan Stanley, RIL’s profits would grow 50 per cent over FY15-18, as it is spending $15.5 billion on four downstream projects. This will add $3.1 billion to its earnings before interest, tax, depreciation, and amortisation. “Our analysis of these projects under various oil price scenarios suggests a 37 per cent higher Ebitda, even with crude oil at $40 a barrel,” it said in a note.

Apart from E&P, shale gas and telecom will also remain a big worry for RIL. A BNP Paribas report said as of FY14, the firm had invested $7 billion in its joint ventures with Pioneer Natural Resources, Carrizo Oil & Gas, and Chevron to acquire shale gas assets in the US. “But the overall value of those assets has also declined on the back of the crude price decline. Also, the company had disappointments in its domestic E&P ventures, for which the gas price rise came much lower than the company’s expectations,” it said.

Morgan Stanley said it had previously expected shale to contribute five per cent of profits by FY18.

“However, weak oil prices mean that shale earnings will decline and production will remain lacklustre, reflecting expected capex cuts of 25-30 per cent. We now expect shale to be less than two per cent of earnings by F18,” it said. The company has announced its plans to sell its stake in the joint venture with Pioneer Natural Resources at a valuation of $4.5 billion. An announcement is expected in FY16.