Reliance's E&P business could see turnaround next fiscal

New gas find in D6 could help reverse declining output, but maintaining output levels at existing fields is key

Foreign investors have been buying shares of Reliance Industries Ltd over the last several quarters, despite some bursts of selling. At the margins, strategists are slowly coming around to the belief that there is a possibility of a turnaround in its exploration and production segment in FY15, though gas production continues to fall. From its peak production of 69 million standard cubic metres a day (mscmd) of gas in 2010, output has fallen to 15 mscmd in May 2013.

This turnaround would be driven by the company's new gas find in the D6 block of the Krishna-Godavari (KG) basin. The new gas find is below the producing reservoir of D1 and D3 in the gas field. This is the first successful strike in 18 months, after the company started re-evaluating the KG-D6 block. Going by Mukesh Ambani's visibly relaxed look at the company's annual general meeting (AGM) on Thursday, it seems hopes of a turnaround might not be misplaced.

During the AGM, Mukesh Ambani told shareholders, "The gas and condensate reservoir, located two km below the currently producing D1 D3 gas fields, has displayed very good potential during the flow test." According to Goldman Sachs, the announced discovery looks significant, given that the largest D6 discovery had a gross hydrocarbon column of 194 metres (MA-2 well). The new gas find has a gross natural gas and condensate column of 155 metres. "If this discovery leads to a new commercial reservoir, it could meaningfully add to D6 reserves," says Nilesh Banerjee of Goldman Sachs.

In FY12, the company's reserve base of oil and gas declined. Analysts now believe the new discovery would put an end to the trend of falling gas output from the KG-D6 basin. Due to limited data, analysts are unable to give estimates on how the new finds would impact gas output and enhance the value of D6. Since the new discoveries are below the existing fields, the time from discovery to development would be shorter.

A further fall in the company's output from the existing fields continues to be a downside risk. In the fourth quarter, too, output has fallen. Daiwa Capital Markets has revised downwards their FY14 and FY15 output assumptions for the company from 21.5 mscmd and 18 mscmd to 14.8 mscmd and 16 mscmd, respectively. Any change in gas pricing would be an additional upside for the stock from the current levels.