 "Market, analysts give thumbs-up to RIL")
Following the Cabinet allowing Reliance Industries Ltd (RIL) a higher gas price of $8.4 per million British thermal unit (mBtu) from April 2014, against the current $4.2/mBtu, the market has given the company a thumbs-up.
With the uncertainty over pricing being removed, the RIL stock closed at Rs 893.65 on the BSE, up 4.58 per cent.
From April, the company might be asked to provide a bank guarantee of $135 million for each quarter, for incremental revenues on production of 10 million standard cubic metres of gas a day (mscmd) from the D1 and D3 fields. It will also have to sign a supplementary agreement with the government for the new dispensation. The bank guarantee will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main gas fields Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block since 2010-11.
The potential cumulative bank guarantee relating to an alleged 150-mscmd shortfall in production through the last four years might stand at about $9 billion, if RIL is found liable, said Goldman Sachs’ analysts in a report dated December 20.
The report said the Cabinet move was positive, as this would end the political debate around the D6 gas price increase, allowing the market to focus on the company’s strong medium-term earnings growth prospects. It added, “While the bank guarantee may concern investors, it would apply only in case it is proved RIL had deliberately not produced enough natural gas.”
RIL has maintained the lower-than-expected production was due to geological difficulties and lower-than-estimated reserves in the block.
It is likely production will remain subdued in the coming days, too. Prakash Joshi and Probal Sen of IDFC Securities said they factored in tepid production growth for RIL between 2015 and 2018, and the recent news didn’t change this. Their estimates for KGD6 production for FY15, FY16, FY17 and FY18 stand at 14, 15, 18 and 18 mscmd, respectively.
Therefore, while the gas price rise bodes well for Reliance, lower volume growth is likely to keep the benefits under check. Religare Capital Markets’ Nitin Joshi estimates the earnings per share for FY15 will increase only Rs 7, despite gas prices being raised substantially.
For RIL, the exploration & production (E&P) segment remains the most profitable, with earnings before interest and tax margins at about 25 per cent. Currently, however, the segment contributes only slightly more than a per cent to revenues and five-six per cent to profits before interest and tax (PBIT). Therefore, the benefits of the price rise will only be seen once gas production increases substantially.
IDFC Securities said the development would boost sentiment in the upstream segment. IDFC Securities’ analysts say, “This latest event highlights our contention that the news-flow-sentiment worthiness of this segment is more than the financial impact.”
In the immediate term, the company’s performance will be gauged by the performance of its largest business segment, refining, followed by the petrochemical segment. While refining contributes about three quarters to the company’s revenues and 52 per cent at the PBIT level, the petrochemical segment contributes 20 per cent to revenues and 41 per cent at the PBIT level.
Prospects of refining, though weak in the near term, are likely to improve. Currently, as the refining capacity exceeds demand and liquefied natural gas prices remain high, refining margins are likely to remain under pressure. Analysts at Credit Suisse feel refining margins will recover due to seasonality and potential closures.
The petrochemical segment is seeing build-up in traction, owing to increasing demand from China. Analysts at Morgan Stanley say margins in this segment are on an upswing.
For the refining segment, they estimate RIL’s gross margins to average $7.8-8.5 a barrel for FY14/15. They see the company doubling its profits between FY13 and FY17, owing to higher gas prices and volumes and downstream expansion. While Morgan Stanley has a target price of Rs 1,156, the one-year consensus target price for the stock, according to four analysts polled on Friday, stands Rs 1,021.
With the uncertainty over pricing being removed, the RIL stock closed at Rs 893.65 on the BSE, up 4.58 per cent.
From April, the company might be asked to provide a bank guarantee of $135 million for each quarter, for incremental revenues on production of 10 million standard cubic metres of gas a day (mscmd) from the D1 and D3 fields. It will also have to sign a supplementary agreement with the government for the new dispensation. The bank guarantee will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main gas fields Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block since 2010-11.
The potential cumulative bank guarantee relating to an alleged 150-mscmd shortfall in production through the last four years might stand at about $9 billion, if RIL is found liable, said Goldman Sachs’ analysts in a report dated December 20.
The report said the Cabinet move was positive, as this would end the political debate around the D6 gas price increase, allowing the market to focus on the company’s strong medium-term earnings growth prospects. It added, “While the bank guarantee may concern investors, it would apply only in case it is proved RIL had deliberately not produced enough natural gas.”
RIL has maintained the lower-than-expected production was due to geological difficulties and lower-than-estimated reserves in the block.
It is likely production will remain subdued in the coming days, too. Prakash Joshi and Probal Sen of IDFC Securities said they factored in tepid production growth for RIL between 2015 and 2018, and the recent news didn’t change this. Their estimates for KGD6 production for FY15, FY16, FY17 and FY18 stand at 14, 15, 18 and 18 mscmd, respectively.
Therefore, while the gas price rise bodes well for Reliance, lower volume growth is likely to keep the benefits under check. Religare Capital Markets’ Nitin Joshi estimates the earnings per share for FY15 will increase only Rs 7, despite gas prices being raised substantially.
For RIL, the exploration & production (E&P) segment remains the most profitable, with earnings before interest and tax margins at about 25 per cent. Currently, however, the segment contributes only slightly more than a per cent to revenues and five-six per cent to profits before interest and tax (PBIT). Therefore, the benefits of the price rise will only be seen once gas production increases substantially.
IDFC Securities said the development would boost sentiment in the upstream segment. IDFC Securities’ analysts say, “This latest event highlights our contention that the news-flow-sentiment worthiness of this segment is more than the financial impact.”
In the immediate term, the company’s performance will be gauged by the performance of its largest business segment, refining, followed by the petrochemical segment. While refining contributes about three quarters to the company’s revenues and 52 per cent at the PBIT level, the petrochemical segment contributes 20 per cent to revenues and 41 per cent at the PBIT level.
Prospects of refining, though weak in the near term, are likely to improve. Currently, as the refining capacity exceeds demand and liquefied natural gas prices remain high, refining margins are likely to remain under pressure. Analysts at Credit Suisse feel refining margins will recover due to seasonality and potential closures.
The petrochemical segment is seeing build-up in traction, owing to increasing demand from China. Analysts at Morgan Stanley say margins in this segment are on an upswing.
For the refining segment, they estimate RIL’s gross margins to average $7.8-8.5 a barrel for FY14/15. They see the company doubling its profits between FY13 and FY17, owing to higher gas prices and volumes and downstream expansion. While Morgan Stanley has a target price of Rs 1,156, the one-year consensus target price for the stock, according to four analysts polled on Friday, stands Rs 1,021.