Experts decode: What went wrong on RIL's petchem shocker

Even though the Mukesh Ambani led Reliance Industries reported its third consecutive drop in quarterly profit; it still managed to beat street expectations. According to Ambani, the profits for the first quarter rose on the back of volume growth in the refining business.

The Gross Refining Margin (GRM) for the June 2012 quarter rose to USD 7.6 per barrel as against USD 7.2 per barrel. Also Read: RIL's Q1 net dips 21% on weak petchem margins
Prayesh Jain, analyst - Oil & Gas at IIFL was expecting the GRMs to be around USD 7 and says this USD 1 premium could have been because of the product mix possibly which could have been shifted towards gasoline. “That could be one of the reasons or the crude mix possibly could be the reason why they beat expectations on the GRMs,” he says.
Revenues from refining were at Rs 85,383 crore while the petrochemical business had sales of Rs 21,839 crore. However, margins for the petrochemical margins have fallen on an annual basis from 12% to 8%.
In refining, which is RIL’s core business, there are capacities coming up in the fourth quarter but there have been some delays on that front, with analysts wondering if it will be the game changer for the company going ahead.
On the refining segment front, Jain expects the GRMs to remain at current levels because although the demand has not been great globally, on the supply side also there are concerns with respect to delays and also there are some closures that are happening in quite a few refineries. Hence, he sees those as supportive.
While the refining figures were in-line with estimates, the petrochemical numbers came in as a shock for Narendra Taneja, bureau chief - South Asia, Upstream. “The rupee-dollar ratio has been helping refining and plus the way they have been sourcing their oil, a lot of it has been coming from Latin America and also from certain parts of West Africa plus the cargo parcels were organised which I think was in the market already that Reliance is doing better than any other company in this part of the world.”
Jain too is definitely concerned over the fall in EBITD margins for petchem. He wasn’t expecting such a sharp fall even though there were some pressures expected. “It is too sharp a fall for us to factor in. Possibly, we are more concerned because the tax rate is at low levels, 17.5% or thereabouts.”
While operationally the numbers seem to be positive, the initial reaction was that it was a very positive set of numbers but Jain does not seem to think it is now.
On petchem this is a very significant decline and looks like polyesters and chemicals have both weighed. “On the petchem side it has to be broken down as to why the EBITD margins have fallen this quarter. On those sustainable regions we will have to tweak our estimate accordingly on the downside and that will have to be factored in,” cautions Jain.
With petchem witnessing such a sharp decline despite NAFTA cracking so sharply, Taneja says one needs to find out what and where things went off-track.
He finds that the previous quarter was not that bad and they had been investing a lot of money as well as management time on the petchem side so somewhere things were not going the way management had expected.
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Taneja suspects Reliance is beginning to lose appetite for taking risk in exploration and production (E&P) because if you are an energy, oil & gas company which Reliance is essentially, it is very important that you actually expand your appetite and you build on that to move into E&P in a big way because real money is there.
“Oil & gas companies around the world be it in China, Canada, Britain, France, Russia or the US that’s the story but I feel that Reliance has started losing a little bit of focus. They recently sold their block in northern Iraq in Kurdistan and in Oman they have sold their assets earlier and there are rumors about Yemen as well,” he says.
He feels that the KG-D6 basin also has been practically handed over to BP, leaving him a little bit worried. He sometimes feels that Reliance is suffering from some kind of mid-life crisis and trying to find a new direction out.
A company like Reliance needs to focus more on E&P because that’s where the money lies if they plan to stay on as an energy company but I think refining is going to kind of stay as their backbone for years to come unless they recollect their strength and start refocusing on E&P, is Taneja’s view.
Whether Reliance changes its mix enough and better enough to be able to recover this remains to be seen.
Right now as we all know that Reliance has been facing very stiff headwinds in terms of policy and regulations. There have been a lot of uncomfortable situations which have been created for the company and the result of that it is not affecting only Reliance but the entire oil & gas sector of the country. Today investment in the E&P business is down by almost 70%. All companies have decided to wait and watch. Basically their argument is if Reliance could deal with the government who can.
The important thing that Taneja points out is that BP has tied up with RIL and BP has bought into the company as far as the KG-D6 blocks are concerned but BP is still not yet on the ground. They are still waiting for many approvals from the government before they can start mobilizing their equipment, men and technology etc because of the government.
The government is not allowing BP even to conduct the surveys which are essentially just to identify the locations for additional drilling and also production well. This is a complete mess as far as the E&P business is concerned of the whole country and Reliance is no exception.
“If you see a bit of de-motivation on the part of Reliance when it comes to the E&P business whether at home or overseas, it is lot to do with the way the government of India has treated the E&P sector as a whole and Reliance in particular,” says Taneja.