Analysts pare Reliance price target

The new Niko KG-D6 estimates are much lower than what was estimated earlier

Reliance’s much-talked about gas story has taken a beating after Niko Resources, its 10 per cent partner in KG-D6 block, announced that gas reserves in the KG-D6 block has come down from 13.1 trillion cubic feet (tcf) of 2P reserves at the start of FY11 to 1.93 tcf in March 2012. The reserves stood at 9.9 tcf by the end of FY11. These numbers are much lower than those declared by Reliance Industries, which owns 60 per cent in the oil and gas reserve.

Apart from the fact that the drop in gas reserves is sharp, there are two reasons why Niko’s numbers may be closer to reality. First, Niko has highlighted that the reserve estimates are certified by a third party, Ryder Scott. In a conference call with analysts, Niko said that all the disclosures have been made after close alignment with the JV partners. It expects KG-D6 oil and gas output to touch between 18-21 mmscmd in FY14-15. This is sharply lower than the market’s expectation of 28-34 mmscmd.

 

Secondly, Niko Resources has disclosed 2P category of reserves of the well as compared to 1P disclosed by both Reliance and BP. 1P reserves are also called as “Proven reserves” which is the area immediately around the well, which that well would be physically capable of producing in its life time. These reserves have a 90 per cent probability of being produced. 2P reserves are “Proven plus probable reserves”, which is the extension of the oil away from the wellbore taking into account very conservative principles. Probable reserves have a 50 per cent probability of striking oil. The 2P method of arriving at reserves is considered to be the best estimate in the industry.

2P reserves are always higher than 1P reserves. Take the case of ONGC, which declares its reserves based on 1P, 2P and 3P (Proven plus probable plus possible) are in the ascending order.

Morgan Stanley in a report on Reliance has quoted Niko as saying that contrary to its earlier expectation D1/D3 fields in the D6 block are not receiving any contribution from outside the main channel. Based on a revised geological model, Niko does not anticipate any reserves outside the main channel and hence the large reduction in reserves.

In its annual report, Reliance has shown a drop in its 1P reserve by 0.4 tcf to 3.7 tcf for its share in the reservoir. This corresponds to 6.27 tcf of reserves. BP, which holds 30 per cent, has given a 1P reserve estimate of 3.33 tcf for the entire reservoir.

However, analysts are increasing believing Niko’s figures and valuing the company based on those numbers. Morgan Stanley values D6 at Rs 88 per share assuming 36 mmscmd of production over 10 years, but Niko’s lower estimates have prompted the brokerage to highlight that Rs 44 per share of this NAV is at risk. Morgan Stanley expects the life of the well to reduce to four years if there is no further exploration or development on the well. It’s no wonder then that the market is readjusting Reliance’s price, which has fallen 3.7 per cent since June 20.

Bank of America has downgraded the company to 'underperform' with a price target of Rs 710 as compared to its earlier target of Rs 760.