An unimpressive performance on its exploration and production front has brought its refining and marketing and petrochemicals business back in the reckoning for Reliance Industries (RIL).
Over the quarters, decline in production from its flagship Krishna Godavari basin has changed the business mix for Reliance Industries (RIL) with refining and marketing now contributing 78.2 per cent of the revenue base and 58 per cent of ebit margins.
During the third quarter of this fiscal, RIL reported ebit margin of Rs 3,615 crore from refining and marketing against Rs 1,685 during the corresponding previous quarter, an increase of 115 per cent.
EBIT (earnings before interest, tax) margins are measurement of a company's operating profitability.
Ebit margin from oil and gas on the other hand is down more than half at 54 per cent, to Rs 590 crore against Rs 1294 crore in the corresponding previous quarter.
The Petrochemicals segment contributed 31 per cent of ebit margins and 20 per cent of revenues at Rs 1937 crore against Rs 2157 crore in third quarter of financial year 2012.
RIL Chairman Mukesh Ambani last week said RIL is investing over Rs 100,000 crore by expanding its petrochemical capacities and adding value to its refining business. “These investments will secure a significant change in RIL's earning capacity on commissioning of these projects," he added.
Riding on high refining margins, last week, RIL reported its third straight quarterly net profit increase, at Rs 5,502 crore. Its gross refining margin-- at $9.6 per barrel--jumped 41 per cent as compared to the third quarter of financial year 2012. Gross refining margin is the difference between crude oil price and total value of petroleum products produced by a refinery.
“After spending billions on exploration and production, RIL has gone back to the days when refining was pretty much its forte. And for the next few quarters to come, we see refining and petrochemicals driving its business,” said the assistant vice president of a domestic broking firm requesting anonymity.
RIL owns and operates two state-of-the-art refineries at Jamnagar, Gujarat. These refineries can together process around 1.24 million barrels of crude every day, giving RIL the advantage of processing heavier grades of crude oil, which comes cheaper.
“RIL has realized it needs to focus on refining and petchem given production from its KG block continues to decline. It was only two years ago when RIL reached its peak in gas production from the KG-D6 with ebit margins from oil and gas at its best 32 per cent,” said a senior analyst from a domestic broking firm.
RIL's changing business mix
During the first quarter of financial year 2011 RIL’s average gas production from KG-D6 was 60 million metric standard cubic metres per day.
RIL produced a total of 22.04 mmscmd of gas from Dhirubhai-1 and 3 gas fields and MA oil and gas field in the KG-D6 block in the week ended December 30, 2012.
Analysts said it would take another two-three years for RIL to stem the production decline from KG D6 and an upside could not be expected before 2016-17.
“Even if there is optimism about gas price increase, only an increase in production can bring in the real change for RIL,” added an analyst.
Petchem, which has been giving away its share in revenue to refining for the past three years, will see an uptake in the coming quarters with RIL investing over $12 billion (Rs 60,000 crore) over next four to five years in refining and petrochemical.
In addition to setting up a $4 billion (Rs 20,000 crore) petroleum coke gasification project that will produce synthetic natural gas that will replace expensive LNG as fuel, RIL is also spending $8 billion (Rs 40,000 crore) on adding capacities of PFY, PET, polyester and intermediate chemicals such as PTA and paraxylene, besides adding new products such as carbon black and rubber.
