D6 drying up? RIL faces investors questions

Are Reliance Industries’ Krishna-Godavari oil and gas blocks drying up?

Gas output from the basin has been fast declining and Reliance Industries, which discovered oil and gas reserves in the basin, has been questioned by the government and the shareholders for the falling output.

Niko Resources, a 10 percent partner of Reliance in the D6 block in the basin, recently cut the proven and probable gas reserve estimate from D6 by 80 percent to 1.93 trillion cubic feet (tcf).

[caption id=“attachment_353842” align=“alignleft” width=“380” caption=“Niko Resources, a 10 percent partner of Reliance in the D6 block in the basin, recently cut the proven and probable gas reserve estimate from D6 by 80 percent. Reuters”]  [/caption]

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The move by Niko is just adding fuel to the fire. Taking note of the news, analysts are also taking a relook at the stock.

“The cut in output has meant a cut in FY14-15 earnings per share (EPS) estimates by 1-5 percent,” said Bank of America Merrill Lynch in a research report.

The brokerage now expects Reliance Industries’ earning per share (EPS) growth at 7-12 percent year on year, down from the earlier estimate of 12-13 percent.

“We are assuming its FY13 earnings growth at 8 percent year on year, but see downside risk from lower refining margin,” it said.

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It also sees a downside risk to gross refining margin (GRM) of $8 barrel. GRM is the margin a refinery gets on each barrel of oil it refines. This is the most important parameter for assessing the profitability of a refiner.

The brokerage has cut its rating to underperform and target price to Rs 710.

Morgan Stanley has also expressed concerns about the new reserve estimate by Niko Resources.

“If the partners don’t do any further exploration and development activities on the block, there is a risk that the reserve life of the block falls to (around) 4 years based on Niko’s reserve estimate,” it said in a research note today.

An _ Economic Times r_ eport today said RIL and partners Niko and BP are planning to invest $4 billion to develop satellite fields in the D6 block.

They are also looking to explore deeper in the fields already under production, the report said citing government officials and company officials.

Shareholders have also been expressing their worries over the company’s huge cash pile and falling share price, Reuters said in a report.

“Earlier, investors gave them the benefit of doubt that cash was being deployed in high-margin businesses, but people are questioning that now,” Michiel van Voorst, a portfolio manager for Asia-Pacific Equities at Robeco Hong Kong, was quoted as saying in the report.

The company has pledged an investment of Rs 100,000 crore to boost its profits. The investments will be done mainly in oil and gas, retail and petrochemicals businesses.

The management is also buying back shares from the market in a bid to boost investor sentiment.

The company will have to devise ways to calm down investor concerns over the huge unused cash pile it has.