)
Falling crude oil prices might be good news for public sector oil and gas companies but investors start pondering over its impact on private firms like Reliance Industries (RIL). The significant decline in crude oil prices might not be good news for RIL, as it dampens sentiments and influences its fortunes.
RIL’s upstream oil and gas segment can see some more downside but it’s a smaller contributor to consolidated revenue and profits. It contributed only 2.15 per cent to gross revenues and about 11 per cent to total earnings before interest and tax (Ebit) in the September quarter. The domestic operations, which produce crude oil and gas, contributed a little less than half of this. As a result and given the subdued street sentiments due to delays in gas price rise, it might not get significant attention consequent to the fall in crude oil prices, feel analysts. Sentiments towards this business can revive if gas price is hiked or if the production potential improves significantly.
Though crude oil prices might not directly impact gross refining margins (GRMs), the soft demand outlook does. Subdued demand and excess capacities took a tool on Singapore-benchmark GRM's, which averaged at $4.8/barrel during Q2'FY15 versus $5.2 in the September 2013 quarter and $5.8 in the June 2014 quarter. Analysts at Ambit say RIL's GRM would be negatively impacted from the weakening gasoil, jet kerosene and naphtha cracks. They say GRMs would remain at mid-cycle levels over the next 12-18 months, as global capacity additions are likely to outpace weak demand growth. While this doesn't sound well, for most of the past six years RIL has managed to sustain good premium over the benchmark. For Q2 FY15 as well, RIL's premium to benchmark improved--it was $1 higher year-on-year at $3.5 a barrel. As a result, its GRMs came in at $8.3 a barrel in Q2 FY15. So, it remains to be seen if RIL can sustain the trend.
The petrochem segment can see some stress on revenue and profitability on lower crude oil price, feel analysts. But, over the medium term, the upcoming refinery off-gas cracker at the Jamnagar can mitigate the impact, as the company will have globally low-cost advantage and can gain by sharply reducing its blended ethylene cost, which will reflect positively on the margin.
Analysts at JPMorgan believe the stock lacks positive catalysts in near term in light of their sluggish refining and petchem outlook, while uncertainty around gas prices and telecom profitability remains. Analysts at Jefferies have cut their EPS estimate for FY15-17 to factor in lower domestic gas price, slightly lower upstream volumes, higher capex on telecom and slower petchem ramp up.
