Reliance Industries looks set for a strong Q4

A 28% jump in Krishna Godavari gas production and a rebound in refining margins is likely to add hundreds of crores of rupees to Reliance Industries’ (RIL’s) bottomline this quarter.

According to sources, natural gas production at its Krishna Godavari field, which is estimated to have contributed Rs 2,300 crore (27.5%) out of RIL’s gross profits (PBDIT) of Rs 8,351 crore in the last quarter, has gone up by around 28% during the ongoing quarter.

From an average of 46 million cubic metres per day during the December quarter, KG D6 gas production is expected to have increased to 58-60 million cubic metres during the current quarter, adding around Rs 640 crore to the company’s PBDIT.
In addition, RIL — owner of the world’s largest single location refining complex — is also likely to see a healthy rebound in its refining margins.

Refining margins had taken a huge hit as the price of crude oil plummeted from around $135 a barrel in April 2008 to a fourth of that by late 2008.    
 
Though crude prices have climbed steadily for more than a year, refining margins continued to be eroded.

For example, margins at the Singapore complex, considered a benchmark for Asia, plunged from around $10 per barrel in the September 2008 quarter to a low of $1.9 during the last quarter.
RIL has typically done better than the Singapore complex as it is able to refine heavier crude and produce a higher share of more lucrative products such as petrol and diesel. However, even RIL, which was getting a $15.5 per barrel in early 2008, saw its margins drop to $5.9 during last quarter.

They (RIL) are now looking up thanks to higher demand for heating oil and energy caused by a colder than expected winter in North America and Europe, notes analyst Sudeep Anand of Religare Hichens Harrison.

“The benchmark Singapore refining margin has rebounded to $5.1 per barrel in the current quarter (to date).. driven by an intense winter season in the US and Europe... Considering the improvement over the past couple of months, we are revising our gross refining margin estimate for RIL to $ 9/ barrel in Q4 FY10 from $7/barrel earlier,” the Mumbai-based analyst said in a report.
RIL’s margin gains may not be as spectacular as that of the Singapore complex as, unlike in the past, many new ‘complex’ refineries, which can deal with heavy crude, have sprung up of late. As a result, the difference between refining margins on ‘light’ and ‘heavy’ crude continues to remain at the low levels seen during the downtrend last year, he warned. “The light-heavy differential remains low, however, at $1.7/barrel due to the sharp production cut from Opec and increased complex refinery capacity,” he said.

While it may not be possible to measure the exact impact of an increase in refining margins and D6 production on RIL’s bottomline, the contribution of increased production from D6 is likely to be of the order of hundreds of crores, thanks to the infusion of Rs 640 crore at the gross or pre-depreciation level.
RIL had posted a net profit of around Rs 4,000 crore during the last quarter.

Refining too is likely to improve its contribution. Profits from refining, prior to taxes and interest costs, had fallen to Rs 1,379 crore during the December quarter from Rs 3,040 crore during the quarter ended June 2008 when margins were above $15 per barrel.