Reliance Industries - Macquarie

Niko says D6 oil, gas start in 3Q CY08
Event
Niko Resources (NKO CN, Not rated), which owns a 10–15% stake in
Reliance Industries’ three E&P blocks, has given an update on the 1Q FY09
operations. It has made one new discovery in the KG-D6 block and two wells
– one each in KG-D6 and NEC-25 are being evaluated. It expects the first gas
and oil production from KG-D6 before the end of the current quarter.
Impact
New hydrocarbon zone discovered in KG-D6. Niko has completed the
exploratory drilling in two wells; while one has been declared a discovery, the
results of the second well are being evaluated. We expect Reliance Industries
(RIL) to announce new discoveries in KG-D6 soon.
⇒ The L1 well, located just outside the D1 and D3 development area, was
the first discovery in the Pleistocene submarine channel complex play.
This complex extends over a significant portion of the block, particularly in
the northern and eastern areas. We believe this opens a new oil and gas
play in the deeper part of the block.
⇒ The MK-1 Cretaceous exploration well, located 11km from the MA oil
development was drilled in 1Q FY09. The results of this well are under
evaluation.
KG-D6 oil and gas production will start in the next two months. The plan
for the development of D1 and D3 gas fields provides for gas production
at a rate of 80mmscmd envisaged within the first year of production. MA
oil field is expected to have peak oil production is 40,000bbl/d.
One new discovery is likely to be announced in NEC-25. One well, B3,
was drilled during the quarter and the well results are under evaluation. RIL
plans to drill additional exploratory locations during the year. The development
plans have been submitted for the six gas discoveries that have been
declared commercial by the Director General of Hydrocarbons (DGH).
Drilling will commence by 3Q CY09 in Mahanadi D4, which could
potentially be much larger than KG-D6. Initial production from 5% of KGD6 is
poised to add 1.4% or US$20bn pa to India’s GDP. Based on the analysis of a
2,365km 2D seismic programme, a further 2,800km 2D seismic programme
and a 3,600sq km 3D seismic programme have been designed and
acquisition is underway with completion expected in 4Q CY08. Once the new
seismic data is processed and interpreted, initial drilling locations will be
selected, possibly as early as mid-CY09. Drilling is expected to follow shortly
thereafter.
Earnings revision
No change.
Price catalyst
12-month price target: Rs2,780.00 based on a Sum of Parts methodology.
Catalyst: New oil and gas finds and enhanced clarity on organised retail.
Action and recommendation
RIL is our top sector pick. We believe RIL's upstream business holds large
potential. We reiterate our Outperform rating and a target price of Rs2,780.