Largely unaffected by crude change
Event
􀂃 Macquarie oil and gas sector head, David Johnson, has upgraded the crudeoil forecast by 5-16% for 2008-11E and the long-term forecast from US$78/bbl to US$83/bbl. We have raised RIL's target price by 1% from Rs3,125 to Rs3,155. We reaffirm our Outperform recommendation.
Impact
􀂃 Fundamentals vs speculation. David has upgraded the oil-price forecast by a significant amount for 2008 to take account of the changing supply/demand situation and the influence of speculators/financial investors on the crudeprice equation.
=> Our demand forecast is based on our economists view that the US and European economies will show slower GDP growth in 2008 and that this will be reflected in a slowdown in the growth of oil consumption - 0.8% growth in oil consumption in 2008 (2007 =1.7%).
=> On the supply side, we look for a marginal rise in non-OPEC production of 0.3m bpd (0.6%) - FSU production accounts for almost all of the growth. We assume OPEC holds production at 32.15m bpd of oil and 5.1m bpd of NGLs.
=> Our oil-price forecast for 2008 is upgraded by US$14.50/bbl to US$102/bbl (WTI) to reflect the larger speculative elements we believe are included in current prices. We assume that these elements wane over time and that oil moves back into a US$80-85/bbl range.
􀂃 Investments led target-price upgrade. We think the effect of a crude-oil price increase on RIL will be small, given that oil (in comparison with gas, refining and petrochemicals) contributes towards a small portion of its business. We are upgrading our target price by 1% to factor in the revised value of RIL's equity holdings in line with current market prices.
􀂃 Volume-driven tripling in earnings. We expect RIL's earnings to triple in the next five years given strong volume growth across businesses (refinery: 88%, petrochemicals: 94% and 22x upstream) despite the margin squeeze. We believe there is a huge upside potential from E&P given RIL's large portfolio of prospective blocks and its outstanding success rate.
Earnings revision
􀂃 We upgrade RIL's FY09E and FY10E earnings by 2.2% and 0.7% as a result of US$15/bbl and US$3/bbl upgrades in the crude price, respectively.
Price catalyst
􀂃 12-month price target: Rs3,155.00 based on a Sum of Parts methodology.
􀂃 Catalyst: New oil and gas finds and improved clarity on organised retail.
Action and recommendation
􀂃 Reliance Industries is our top sector pick. Reliance Industries has planned a large capex of more than US$20bn over the next five years, which we think is likely to triple earnings in five years. In addition, the investments in highgrowth businesses like E&P and retail may lead to a consistent rise in ROE
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