Reliance Profit Growth May Slow as Refining Margins Set to Drop

Reliance Industries Ltd. (RIL), India’s biggest company by market value, may see profit growth slow as earnings from processing crude oil drop from a two-year high, investors said.

The company’s 14 percent increase in net income in the three months ended March 31 to 53.8 billion rupees ($1.2 billion) was the slowest growth in six quarters. Profit missed the 54.3 billion rupee average estimate of 18 analysts in a Bloomberg survey after output of natural gas fell.

Refining margins at Reliance, controlled by billionaire Mukesh Ambani, rose 23 percent in the quarter and helped counter an 8 percent decline in earnings from exploration. That may change as refineries in Japan and China ramp up output, adding supply and reducing profitability of turning crude into fuels. Reliance runs the world’s largest refining complex and got 87 percent of its revenue last year from processing oil.

“Profit will be flattish from quarter to quarter as refining margins may be near a peak and gas production is not increasing,” said Peter Varga, who helps manage about $300 million of emerging market corporate debt in Vienna at Erste Sparinvest KAG and owns Reliance bonds. “As capacity will come live in Asia, margins will slowly fall.”

Reliance sold 30 percent in 23 oil and gas areas to BP Plc to boost output from its biggest gas area and increase earnings.

Reliance has declined 1.7 percent this year in Mumbai compared with a 4.4 percent drop in the benchmark Sensitive Index. The shares rose 1.4 percent to 1,040.60 rupees at the close of trading on April 21 before the earnings were announced. Reliance, with a market value of about $77 billion, has the highest weighting in the benchmark index
Singapore Margins

Margins of complex refiners in Singapore processing Dubai crude rose to a record of $7.47 a barrel on March 4, the highest level since Dec. 2. They fell to $3.60 a barrel on April 20, the lowest since March 9, according to data compiled by Bloomberg.

Reliance’s pretax profit from refining rose 26 percent to 25.1 billion rupees in the quarter, according to the earnings statement. The company’s two adjacent refineries in the western state of Gujarat earned $9.20 on every barrel of crude oil turned into fuels compared with $7.50 barrel a year earlier.

“We probably are going to see refining margins in Asia moderate from the highs of the first quarter as diesel cracks begin to ease in the region,” said Vivek Mathur, a Boston-based oil market analyst at Energy Security Analysis Inc. “Japan’s refineries are also coming back up after the earthquake and we see a fuel surplus.”
Gold in Ground

Refiners in Japan, including Cosmo Oil Co., are ramping up production after the nation’s biggest earthquake idled about 29 percent of processing capacity.

Lower than estimated gas production is also weighing down on Reliance’s profit growth. Pretax profit from selling crude oil and gas declined 8 percent to 15.7 billion rupees in the quarter, Reliance said in an e-mailed statement.

“The cost of energy makes this gas like gold in the ground,” said Chokkalingam G., chief investment officer at Centrum Wealth Managers Ltd. in Mumbai. “Even if there’s a moderation in refining margins, at some point of time gas output will rise again and profit growth will pick up.”

Reliance produced 161.9 billion cubic feet of gas from the KG-D6 block in the three months ended March 31 compared with 190.1 billion cubic feet a year earlier, according to a presentation on its website.
Complex Reservoirs

“Based on over two years of production data, the reservoirs appear to be more complex than earlier envisaged,” Reliance said in the presentation. The company hasn’t said when output will rise.

The government isn’t satisfied with Reliance’s explanation for the decline, S.K. Srivastava, director general at India’s oil regulator, told reporters in New Delhi April 21, without elaborating.

BP agreed in February to pay $7.2 billion for a 30 percent interest in 23 blocks in India from Reliance and to form a venture to market gas.

Reliance had outstanding debt of 674 billion rupees as of March 31 and cash and equivalents of 423.9 billion rupees, the company said in its earnings statement of April 21.