KG gas discovery renews investors’ interest in Reliance Industries

Brokerages have shunned stock of Reliance Industries last couple of years.

By R. Chandrasekaran

CHENNAI: Mukesh Ambani-controlled Reliance Industries came back to limelight in the Indian stock markets on Monday after the company disclosed that it has discovered a new natural gas find in its largest block, Krishna Godavari D-6 or (KG-D6) block, off India’s east coast.

On Friday, the company, which has a partnership with the United Kingdom-based British Petroleum Plc and Canadian based-Niko Resources Ltd, revealed a major gas discovery and related liquids in the KG-D6 block in the Bay of Bengal. This is expected to lift Reliance Industries’ bottom line significantly as the company struggled with a falling production from the block in the last few years resulting in the unfavorable impact on its earnings in the last few quarters.

Analysts from various brokerage houses have shunned the stock of Reliance Industries in the last couple of years citing drop in production of Gas from the KG block. This is despite the company’s big cash pile of Rs.829 billion that could be used for various expansion plans such as retail and 4G launch.

Therefore, the latest news on new gas discovery has rekindled the investors’ interest on the Reliance Industries shares. Shares of the company jumped 5.12 percent in both the Bombay Stock Exchange as well as the National Stock Exchange on Monday.

It is estimated that Reliance can get a gas output of approximately 50 million standard cubic meters per day by the financial year 2018. Deutsche Bank, meanwhile, reportedly believes that an additional deep-water rig that is planned to take off in a couple of months from now on could further accelerate exploratory or development work of the company’s drilling activity.

Similarly, the discovery is likely to yield 1.2 billion barrels of in-place oil reserves to Reliance Industries. The alliance between BP seems to be paying off to the company. BP has purchased stakes in KG-D6 and 20 more blocks for about $7.2 billion in 2010 as Mukesh Ambani wanted BP’s expertise in drilling and deep water areas. The new gas find could also be a game changer for the company given the sluggish performance in the bourses during the last few years as there was no other catalyst to reverse the sagging performance.

The latest event has also allowed analysts from various brokerages to re-rate the company’s stock. This could be seen from the way Hong Kong-based Stanford C Bernstein and Co. upgraded the shares to outperform. More analysts from other brokerages will follow suit with a more or less similar rating.

However, the prices may hold key to further exploration. Bernstein Research has reportedly wanted the gas prices to be increased to $8 from $4 so that further exploration and future development can be attractive and economically viable.

The new gas find would undoubtedly rekindle investors’ interest on Reliance Industries as news of its impact will start trickling in the next few days. Surely, this is a game changer for Reliance Industries.

 

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