Gas Price to Dent Reliance Industries, but EPS May Still Double: Barclays

New Delhi: Reliance Industries will get 33 per cent higher gas price of $5.61 per mmBtu for output from MA field in the KG-D6 block, but its main D1&D3 fields will continue to get old rate of $4.2.

The difference between the old and the new rate from November 1 will be deposited in a gas pool account managed by GAIL. RIL will get this money only if it is able to prove in the ongoing arbitration that gas output falling to a 10th of the projected 80 million standard cubic meters per day from D1&D3 fields was due to geological reasons and not deliberate.

Barclays Equity Research said this will have a drag on RIL shares. But there still is potential upside and earning per share (EPS) and return on capital employed (ROCE) "may still early double in FY16-21" mainly due to ongoing expansion projects particularly in petrochemical stream, it said.

In a research note, it said the government on Saturday tweaked the Rangarajan gas price formula, approved by the previous UPA government, to exclude LNG but include Canadian and Russian gas prices while also linking it to gross calorific value.

It expected gas prices to remain below $6 per million British thermal unit in the next couple of years.

Stating that the new price may not be enough to incentivize new projects, Barclays said, "The government recognises this, indicating that deep, ultra-deep and high pressure/high temperature (gas) projects will get a premium."

"It is unclear, however, if this applies to new discoveries or, more rationally, to new developments of existing discoveries too."

Also, it is unclear how the premium would be set. "If the government just allows producers to recover cost of capital, for example, new projects may not be value-accretive even if they add to EPS," it said.

Indeed, the review may become cumbersome too, especially on capex scrutiny, and may effectively imply regulated prices for new projects, denting the scope and pace of development.

"The (gas price) announcement may disappoint Reliance as it will realise the old $4.2 price for D1-D3, with the differential flowing to an escrow, till the output shortfall arbitration concludes. This may take years although the GCV link will raise effective prices to $4.6 (from current $4.2), we estimate," it said.

However, output from MA field in the same KG-D6 block, where on which there is no dispute over output not matching projected targets, will get the new price. All new gas fields that RIL being to production will also get the higher rates.