Reliance Industries may monetise part of US shale assets

Written by fe Bureau | Mumbai | Updated: Oct 14 2014, 07:01am hrs
Oil-to-yarn conglomerate Reliance Industries (RIL) will seriously look at monetising part of its shale gas business in the US if the price offered to it made sense, the companys chief financial officer Alok Agarwal said on Monday.

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Commenting on reports that RIL was looking to sell part of its interest in the Eagle Ford shale gas venture, which it operates in partnership with US-based energy firm Pioneer Natural Resources, Agarwal said this asset was RILs most successful one out of its three shale gas assets in the US and had acquired decent valuation over the last 12 months.

We (Pioneer and RIL) are looking how best to take this joint venture forward and the question to answer is that whether there is a better use of capital, Agarwal said. We are evaluating if we should monetise and, if someone makes an offer at a price that makes sense, we will seriously look at it.

Agarwal said RILs investment in the Eagle Ford assets that are under production had yielded a return on capital employed of around 12% for the company.

Impacted by lower prices, RILs US shale gas business reported a 12.7% sequential and 17.3% year-on-year decline in operating profit to Rs 488 crore. Turnover from the business rose 33.7% year-on-year in the same period, and remained flat over the preceding three months.

RIL has invested around $7.5 billion across three shale gas assets in the US till date. The business has been a highly lucrative one for the company, and has helped its oil and gas vertical offset domestic weakness in the form of declining gas output at KG-D6.

The conglomerate, which announced its results on Monday, posted a 1.7% year-on-year gain in consolidated net profit for the quarter ended September 30 at Rs 5,972 crore, in line with Street expectations.

The Mukesh Ambani-led company posted a marginal rise in profitability over the September quarter of fy14 as weakness in its largest business of crude refining and marketing was partially offset by the companys petrochemicals business, which put up a strong show.

Net profit in the July-September period was nearly flat over the preceding quarter.

Turnover fell 4.3% year-on-year to Rs 1.13 lakh crore during the September quarter due to softness in crude oil prices and lower volume of crude processed. On a sequential basis, revenues rose 5.1%.

Renewed optimism in the domestic economy augurs well for business and consumer confidence particularly against the backdrop of continuing concerns on global economic growth, RIL chairman Mukesh Ambani said in a statement. We expect to create significant value for our stakeholders over the next 12-18 months as we complete our large investment programme across energy and consumer businesses.

RILs crude refining business posted an operating profit of Rs 3,844 crore in July-September, 0.8% higher sequentially and 18.5% higher over the year earlier. Turnover from the business rose 5.6% quarter-on-quarter and dropped 6% over the September 2013 quarter.

The companys gross refining margin (GRM), or the difference between the value of petroleum products sold and the cost of processing crude, averaged $8.3 per barrel during the quarter, lower than the $8.7 reported in the June quarter. The decline in refining margins was on account of lower margins on individual products sold like diesel, naphtha and petrol.

Despite the decline in GRM, the company as able to better its premium over the regional benchmark Singapore GRM, which averaged $4.8 per barrel. The premium enjoyed by RILs margin over the Singapore GRM improved due to wider differential between lighter and heavier varieties of crude during the July-September period. RIL benefits from a bigger difference between lighter (expensive and purer) and heavier (dirtier and cheaper) varieties of crude as its refinery in Jamnagar, Gujarat is highly complex, which can process heavier crude to yield the same product slate that other refiners produce using more expensive fuel.

The weakness in RILs refining business was mitigated by its petrochemicals vertical, which saw a 26.7% quarter-on-quarter jump in earnings before interest and tax to Rs 2,361 crore. Revenues from the business grew 5% sequentially at Rs 26,651 crore, though they fell 1.8% over the year earlier.

Cracking margins across the petrochemical chain in products like polyethylene and polypropylene have been better during the quarter due to lower feedstock prices, RILs joint chief financial officer Alok Agarwal explained.

RIL has invested around Rs 45,000 crore towards capital expenditure in the first half of the current fiscal, and will be investing another Rs 50,000-55,000 crore in the remainder of the fiscal across businesses like petrochemicals and its upcoming telecom venture.

RIL had a gross debt of Rs 1.42 lakh crore as on September 30 and cash and cash equivalents of Rs 83,456 crore.