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

With the government lowering gas prices from April 1, India’s largest company, Reliance Industries will have to wait longer to see any turnaround in its exploration and production (E&P) business which is stagnating from the last few years.

Analysts said the current stock price of the company reflects zero enterprise value for its E&P, shale gas and telecom businesses and they do not see any turnaround in these businesses in the near term.

On Wednesday, RIL’s shares closed at Rs 834 a share. The stock has lost 11% or Rs 31,000 crore of market value in fiscal 2015 as the company fought the Indian government over gas prices and capex recovery. The D6 gas field volumes — currently at 11 mmsmcd – will continue to decline, say analysts.

While a detailed questionnaire to RIL on the E&P business did not elicit any response, analysts at Morgan Stanley said RIL’s domestic E&P is becoming inconsequential to RIL’s earnings while it is entangled in an expensive arbitration with the government on gas price.

The government’s move to reduce gas prices by 8% from April 1 following a sharp fall in oil prices and imported LNG prices will further hit the company’s plans to revive the E&P business.

Interestingly, while the government reduced gas prices to $ 4.66 a unit from this month, Reliance is still getting $ 4.2 a unit for gas produced at its D6 gas fields. Depending upon the outcome of the arbitration, RIL will get or not get the money now deposited in a pool account.

“Our analysis suggests that the current stock price reflects zero enterprise value for its telecom assets, domestic E&P, and shale businesses. This implies the market is already factoring in the worst outcome,” said an analyst with Morgan Stanley.

But the lack of gas from the KG-D6 fields has not only hit a slew of power companies across India, it has also hit the pipeline company – owned by Mukesh Ambani personally.

The pipeline company transports gas from Andhra coast to Gujarat. During fiscal 14, RGTIL reported loss after tax of Rs 3,402 crore on a total income of Rs 1,452 crore as compared to a net loss of Rs.911 crore on a total income of Rs 4,043 crore during FY13. The losses of the pipeline company will increase further in fiscal 2015.

The global bank, however, has predicted that the company’s profits to grow 50% over fiscal 15-18 as the company is spending $ 15.5 billion on four downstream projects.

This will add $ 3.1 billion to its earnings before interest, tax, depreciation and amortization (EBITDA). “Our analysis of these projects under various oil price scenarios suggests 37% higher EBITDA even with crude oil at US$ 40 a barrel,” Morgan Stanley analyst said in a note dated March 31st.

Apart from E&P, for the next few years, shale gas and telecom will remain another big worry for the company. A BNP Paribas report said as of FY14, the company invested $ 7 billion in its joint ventures with Pioneer Natural Resources, Carrizo and Chevron in acquiring shale gas assets in US.

“However, 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 hike came much lower than the company’s expectations,” it said.

Morgan Stanley said it had previously expected shale to contribute 5% of profits by fiscal 18. “However, weak oil prices mean that shale earnings will decline in F16e and production will remain lackluster, reflecting expected capex cuts of 25-30%. We now expect shale to be less than 2% 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 this fiscal.