Government of India has finally approved the pricing of RIL's D6 gas at $ 4.2/bbl. This development is positive for the timelines of the project and allays any fear of delays in gas production on account of government approval delays on gas pricing. The approval also allays investor's apprehension on market pricing of gas from any future finds and could set a precedent for the market based price discovery formula for gas.
But, even now the overhang of court cases remain over the final pricing and contractual obligations for D6 gas. In its interim judgement, the Bombay High Court has restricted RIL from selling D6 gas to any party other than the counterparties in the dispute and for RIL's own captive usage. Thus, even after the government's approval, RIL might have to wait for the final court verdict to enter into gas sales contracts.
HSBC lower their gas price assumption for D6 gas to $ 4.2/mmbtu from $ 5/mmbtu earlier. While they expected pricing for D6 gas to be at the higher end of the $ 4.5-5.0/mmbtu band, pricing has come in below the lower end. Also, the earnings and valuation estimates for RIL are now based on post-IPCL merger equity base of 1,454m shares (1,394m earlier), which includes treasury shares amounting to 198mn. While our FY08e net profit estimates for RIL have gone up on the IPCL merger, EPS is marginally lower on account of dilution. Net profit and EPS for FY09e are also revised downwards by 3% and 7% respectively on lower gas price assumption and merger impact. Our Sep'08 end target price (earlier Mar'08, INR2,215) for RIL stands at Rs 2,298 after adjusting for lower gas price and dilution (post-IPCL merger).
As per press reports, the pricing approved by the government would be valid for 5 years after which the government would re-look at it. Since the KG D6 block is under a production sharing contract wherein the governments share of oil/gas profit increases in step from a low of 10% to a high of 85% in 5-6 years time, we expect the pricing beyond 5 years period to have less impact on RIL's D6 gas valuation.
HSBC estimates for RIL are based on post-IPCL merger equity base. They shift their target price to September '08 (from March' 08 earlier) raising it to Rs 2,298. Remain Overweight
But, even now the overhang of court cases remain over the final pricing and contractual obligations for D6 gas. In its interim judgement, the Bombay High Court has restricted RIL from selling D6 gas to any party other than the counterparties in the dispute and for RIL's own captive usage. Thus, even after the government's approval, RIL might have to wait for the final court verdict to enter into gas sales contracts.
HSBC lower their gas price assumption for D6 gas to $ 4.2/mmbtu from $ 5/mmbtu earlier. While they expected pricing for D6 gas to be at the higher end of the $ 4.5-5.0/mmbtu band, pricing has come in below the lower end. Also, the earnings and valuation estimates for RIL are now based on post-IPCL merger equity base of 1,454m shares (1,394m earlier), which includes treasury shares amounting to 198mn. While our FY08e net profit estimates for RIL have gone up on the IPCL merger, EPS is marginally lower on account of dilution. Net profit and EPS for FY09e are also revised downwards by 3% and 7% respectively on lower gas price assumption and merger impact. Our Sep'08 end target price (earlier Mar'08, INR2,215) for RIL stands at Rs 2,298 after adjusting for lower gas price and dilution (post-IPCL merger).
As per press reports, the pricing approved by the government would be valid for 5 years after which the government would re-look at it. Since the KG D6 block is under a production sharing contract wherein the governments share of oil/gas profit increases in step from a low of 10% to a high of 85% in 5-6 years time, we expect the pricing beyond 5 years period to have less impact on RIL's D6 gas valuation.
HSBC estimates for RIL are based on post-IPCL merger equity base. They shift their target price to September '08 (from March' 08 earlier) raising it to Rs 2,298. Remain Overweight
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