FE Editorial : Refining profits

Written by The Financial Express | Updated: Jan 19 2013, 07:03am hrs
Reliance Industries Limiteds (RIL) performance in the December 2012 quarter is evidence of how competent a refiner it is; the oil and gas giant reported a gross refining margin of $9.6 per barrel, a premium to the Singapore benchmark, in a fairly challenging pricing environment. Experts point out this is the result of some excellent sourcing strategies with the company looking at markets like Africa and Latin America. Of course, the petrochemicals business has contributed significantly to the companys bottom line R5,502 crore, a jump of 24% yoy and 1.7% sequentially. In a revival of sorts, ebit (earnings before interest and tax) margins for the petrochemicals segment came in at 8.8% up nearly 100 basis points over the September quarter.

After having been a laggard for close to three years, it has outperformed the Sensex in the last six months with a return of 25.7% to the benchmarks 16.7%. Some of this is based on expectations that the price of gas may be upped to $8 per unitas suggested by the Rangarajan committeepost 2014 from the $4.2 per mmbtu that RIL now earns. The price hike is expected to be accompanies by an increase in production at the KG D6 basin, now at sub-30 mmscmd levels and way below the peak projected levels of 80 mmscmd. In the December quarter, revenues from the E&P division came of 32% yoy and the Street is eager to see RIL restart exploration activity after a halt of nearly two years; RIL is understood to be working on an integrated development plan for KGD6 that might see the reserves being upgraded and provide clarity on the output of gas, a key driver of earnings.

While the lack of clarity on how the company planned to utilise its huge cash flows had weighing on the stock, the management has offered some insights, saying on Friday it intended to invest R1,00,000 crore in the petrochemicals and in adding value to the refining business. That is encouraging because the capital employed at the end of the nine months to December at R2,62,342 crore wasnt much higher than the what it was a year ago. The Street has also been anxious that newer revenue streams would take time to contribute meaningfully to profits; the management commentary gave little colour on the broadband initiative merely asserting it is the process of setting up a world class network. While the retail business is gaining in scalerevenues for the nine months to December were up 44% yoy to R7,749 crore, but profits, if any, would be measly. Its not as though there arent any irritantsthe arbitration on the profit-sharing for oil exploration, for instance, hasnt really taken offand RIL does need to find more oil and produce more gas. In the meantime, the good set of numbers should keep the stock afloat.