RIL stock falls as E&P concerns keep analysts worried

The market on Monday gave a thumbs down to Reliance Industries (RIL) stock, India's biggest company by market value, as the company failed to meet street expectation on lower than expected refining margins and flat natural gas production from its flagship Krishna-Godavari basin.

The company, which has a near 12 per cent weight in the Sensex, fell nearly three per cent to Rs 1,009.10. The company's net profit for the quarter ended March 31, rose 14 per cent to Rs 5,376 crore against Rs 4,710 crore in the corresponding previous quarter.

Though Elara Securities in its report predicted stable earnings for RIL for the next two-three quarters, there are concerns among analysts on the company’s expectation on exploration and production (E&P) volumes. Also, higher oil production from Panna-Mukta-Tapti has been unable to compensate for the KG-D6 oil and gas volume declines. During the quarter, RIL reported gross refining margins (GRMs) of $9.20 a barrel, missing the street's estimate of $10 a barrel. GRM is the earning on turning every barrel of crude oil into fuel.

RIL operates the world's biggest refining complex’s in western India. “Refining GRMs at $9.2 per barrel ($1 per barrel below our expectation) was disappointing considering the rest of Asia is likely to see record earnings in the refining and petchem chain. RIL’s spread over Singapore GRMs reduced to $1.9 per barrel (the lowest in the past 20 quarters) despite an improvement in light-heavy spreads. RIL attributed lower GRMs to shutdown of FCC unit and lower margins in Petcoke and other solid products. We expect spreads to normalise in the next quarter, considering the shutdown is behind us,” Morgan Stanley said in its report.

Another report from Credit Suisse said though RIL refuses to provide D6 volume guidance, execution of a new work programme at D6 – leading to volume growth – remains important to earnings per share forecasts. In its presentation to analysts, RIL said boosting gas output was proving "more complex than earlier envisaged". RIL said its reservoir team is focusing on maximising productivity of both oil and gas production from KG-D6 fields over its life. It said studies are underway to understand the reservoir and efforts are on to identify well locations for incremental production and sustenance. However, the time frame for this exercise is unknown.

Gas output from the block touched a peak of 60 million metric standard cubic metres a day (mscmd) last year, but has since fallen to 50 mscmd.

The company also indicated it might not have to file a revised Field Development Plan (FDP), but may look for approvals for changes through the ongoing budgeting processes. This implies RIL may still be able to drill the requisite wells and seek to increase output sometime in late 2012-13.

RIL and British Petroleum, this February, signed a multi-billion-dollar deal where BP has agreed to pay $7.2 billion for a 30 per cent stake in Reliance's 23 largely unexplored deep water oil and gas fields, including D6. The tie-up is yet to get government approval. The company had also engaged Shell for technical support in boosting production.Analysts said the company has provided little clarity on any firm plan for the deployment of its cash reserves.

During the quarter, RIL had cash and cash equivalents of Rs 42,393 crore mainly in fixed deposits, certificate of deposits with banks, mutual funds and government securities and bonds.

“RIL is struggling to deploy the cash it is generating from its businesses. Given the size of the company and limited organic growth options, maintaining the historical earnings growth of 23 per cent per annum is a tall task for the company in the absence of an aggressive inorganic growth strategy. This is likely to erode the premium that RIL has commanded traditionally over integrated global oil and gas companies,” HSBC stated in its report.