Gas price over $6.5 key to monetisation of RIL discoveries

A gas price of over $6.5 per million British thermal unit is a prerequisite for early monetisation of discoveries made by Reliance Industries, Deutsche Bank said.

A four-member panel of secretaries is likely to submit its report on a new gas pricing mechanism to the government by Wednesday.

The committee was formed as the Rangarajan price formula, which would have doubled the gas price to $8.4, was found unacceptable to the government.

"Our channel checks indicate that a gas price over $ 6.5 per mmBtu is necessary to enable monetisation of RIL's deepwater discoveries," Deutsche Bank Market Research said in a note.

It expected RIL to focus on development of R-series and satellite gas discoveries in the eastern offshore KG-D6 block as well as coal-bed methane block in Madhya Pradesh and discoveries in NEC-25 block once clarity emerges on gas price.

"Every $1 per mmBtu hike in domestic natural gas price raises RIL's FY16 EPS by 2 per cent," it said.

RIL stock has underperformed the BSE Sensex by 15 per cent over the past three months as the gas price hike was deferred and regional refining margins collapsed from over $ 6 per barrel in May to close to $3

in August.

"We expect the government's announcement of a gas price hike by October 2014 and a bounce back in refining margins from recent lows to be near-term catalysts for RIL," it said.

Commissioning of expanded capacities in petrochemicals and refining will drive RIL's earnings growth and valuations in FY16 and FY17.

"We estimate RIL's FY14-17 EBITDA at 24 per cent driven by capacity expansions," it said.

Over the past month, regional refining margins have strengthened to over USD 5 per barrel from close to $3 in August.

"Higher capacity shutdowns and winter demand should help Asian and hence RIL's refining margins to bounce back from recent lows," it said.

Oil Minister Dharmendra Pradhan had told the Parliament last month that the NDA government decided to review the pricing formula keeping in mind public interest and recommendations of the Parliamentary Standing Committee.

Parliamentary Standing Committees on Finance as well as Petroleum had called for a review of the formula suggested by the Dr C Rangarajan headed panel, saying gas price should have some linkage with the cost of production.