KGD6 likely to hurt RIL for another 2 quarters: Expert

Big boy Reliance Industries has delivered a stable fourth quarter performance. The oil and gas major's profits have declined just 4.5% sequentially to Rs 4,230 crore. Refining and petchem performance is slightly better-than-expected. Gross refining margins (GRMs) have surpassed estimates at USD 7.60/bbl.

Lower production from its KGD6 and weak refining margins dented profits. Sales, grew 16% (YoY) to Rs 87833 crore. Net profit for FY12 also declined 1.2% to Rs 20040 crore, YoY but sales grew 31% to Rs 339792 crore. Experts however are unhappy with the upstream performance with EBIT margins and high other income being the main factors being the disappointments. They acknowledge though that better sourcing and better markets helped the company's performance.
In an interview to CNBC-TV18, Narendra Taneja, energy expert warns that challenges of KGD6 will continue to be a challenge atleast for another two quarters. Blaming the government for inaction, Taneja points out that BP with its technology and team can help only then.
"The company’s efforts are taking longer. So, I think unless government is a little bit more helpful you will see further decline in KGD6 for next two quarters. If at all we will see some improvement beginning lets say starting in the last quarter," he adds. Here is an edited transcript of his comments. Also watch the accompanying videos. Q: The refining performance by Reliance has been pretty decent. No one on the street expected a USD 7.6/ bbl delivery from them in a quarter when Singapore GRMs were actually USD 7.7/bbl and last quarter around their discount had widened quite a bit. What do you think is helped them narrow the gap again?
A: The sources of crude and also finding better markets where they were able to actually get better price for petroleum products such as the United States and also certain markets in the Middle East.
I think they have also managed to secure more oil from Latin America particularly Venezuela and Angola which has helped the situation, in the sense that they got better deals.
I think they have more or less got back the same strength in the last quarter. Probably we are going to see repeat of that in the next quarter as well but as the Reliance strength has always been securing crude at a very good price and at the same time making good money while bringing that crude oil to the refinery in trading, on high season particular.
 So I think this particular quarter they have been good in trade as well as in sourcing crude oil at a very good price. Q: Do you think there was also an element of inventory gains involved here because if you look at the movement that refining margins had through the quarter, it was very volatile. In the first we had a very decent up move, but towards the end they had lost quite significantly – about a 50% cut. Do you think inventory gains might have played some part in this outperformance?
A: Yes it did. As you know they have inventory basis not only in India, but in Middle East and in the Caribbean. They definitely used that to their advantage in a very smart way, though part of the refinery was shut down for couple of weeks for maintenance. Despite that I think the way they have been using their facilities in the Middle East and in the Caribbean has also contributed undoubtedly. Q: What have you made of the Petchem segment, contrary to expectations it’s been a much decent delivery than what everyone has expecting. I think Mr. Tulsian’s point is well taken that they have been able to push through their sales?
A: Along the expectations I would say. If you see the company and the kind of internal changes that they had introduced and the kind of focus that petrochem segment has been getting from the top management in the last six to seven months, so I was expecting this.
As we all know that since the problems in the exploration production segment they have been focusing a lot on the petrochem segment which has been kind of been their strength for very long time.
We have seen the results and in the following quarter you may see further improvement unless ofcourse the external factors compel them to go in different direction.
I think to me its along the expected lines, I am not surprised. If I am surprised is just the positive, I was expecting slightly more but I think it’s still very much along the expected lines. Q: What do you make of the exploration and production (E&P) segment? I think the volume delivery on KGD6 has been below expectations. The market knew about further fall away from what Q4 performance has been. Do you think it will continue to fall, what are the levels you are expecting the production to stabilise at?
A: KGD6 is a huge challenge for the company and I think it will continue to be a challenge atleast for another two quarters. BP is only moving in now and with their technology, their team and all that, but the government is not helping the situation that’s why BP is taking longer.
The company’s efforts are taking longer. So, I think unless government is a little bit more helpful you will see further decline in KGD6 for next two quarters. If at all we will see some improvement beginning lets say starting in the last quarter.
Overall if you look at the E&P or upstream business of the company, there are challenges, where they have invested heavily in Yemen, Oman and Brunei and a few other places. There are challenges, but upstream by nature is unpredictable business. But my own assessment is that from next year when BP moves in firmly and starts handling the reservoir it will address the biggest challenge-behaviour of the reservoir of D6 which Reliance has not been successful in handling.
So, BP is expected to deal with it more successfully and we will start seeing the fruits and the results starting from the next financial year. But the real results would take atleast another two years before that starts reflecting in terms of quarterly or annual numbers or the balance sheet of the company.
Personally, I think KGD6 is a very good reservoir, but they will need to invest more, they will need to work harder on that.Above all the government will have to understand and help the situation because right now the chill that exists between Reliance and the government particularly ministry of petroleum and natural gas and director general of hydrocarbons is not helping the situation. It has demoralised the company and the workforce and that’s reflecting in the numbers we are discussing right now. _PAGEBREAK_ Q: When will telecom venture happen?
A: It is in pipeline but it will take longer. Reliance DNA is energy, and they should spend more time, energy on converting RIL into a super major in terms of energy. Reliance may diversify into nuclear, hydropower and thermal power, etc.
The company looks bullish on 4G, but the success of 4G will depend on the overall economic sentiments in the country. Acceptance of 4G depends on the purchasing power of the people.
Even, if you have access to 4G, the question is, does one really want to pay extra money in order to access the facilities, info and the products that would be available in 4G. There are many questions being asked not only in the telecom sector but also in the energy sector.
I think it will take longer than expected, earlier before 4G starts showing positive results in the Reliance umbrella. Reliance should focus on its core competence, its DNA and that is energy and there is plenty of scope in that sector and they are better equipped to do that and give better results to share holders and to the country as a whole. Q: Do you think it will be possible for the government to actually lower their deadline from 2014 to slightly earlier? Could there be any positive news on the gas pricing front?
A: Yes. Right now, we are importing nearly 25% of total requirement. Our dependency on LNG is growing. LNG prices are not going down thanks to Fukushima. Overall situation is compelling us to pay more to import gas. At the same time we are not incentivised the gas production in the company by keeping gas prices at the same level.
There will be some debate and the government may come around including the ministry of petroleum and natural gas if not in later part of this year probably by say Q1 of next year. Fertiliser and power lobby will protest on it and also the government of Andhra Pradesh, but looking at the overall picture they have to create an eco-system where investment into gas sectors are incentivised. British Petroleum, Reliance all put together would see some results. We will see something happening in first half of 2013 in terms of gas prices being revised – not very substantially but a significant change. Q: Do you expect PNGRB to continue with its aggressive stance and go ahead and cap marketing margins?
A: First of all there are lots of questions regarding the validity of PNGRB board. Is it fully independent on the ministry and is it regulated the way the telecom regulatory board is regulated. My view is that they are not Battle for power is on between the board and the ministry of petroleum and natural gas.
In the coming months the petroleum and natural gas ministry will play a bigger role and industry will go directly to the government.
The government is beginning to realize that we are moving into the gas century and the need to provide incentive to the sector otherwise the problems will multiply and that would have a very negative impact on the economy.
The government needs to come out with a uniform policy, so that the perception of international players, investors and Indian companies is such that it looks like a more fair game. Right now the whole sector, particular the gas sector is in a mess especially on pricing front. The situation is now moving in the direction where government would be left with no other alternative but to streamline and modernize this sector.
Things have begun to happen. There are more mistakes committed by regulatory boards and DGH, etc. Right now, the whole gas industry is on more regulatory mode. They need to learn. I see wide spread gas illiteracy and that’s why the industry and the sector is suffering. Q: What's the next big trigger in your eyes for Reliance Industries?
A: Do not expect next year to be spectacular. They need to focus more on upstream sector. Reliance need to make sure that the D6 reservoir starts behaving and they are able to bring that gas to the market.
They are very much on hunt to acquire a medium-sized E&P company and if they are able to workout to their advantage then that probably will be a new big story that will help the upstream numbers in particular in the next fiscal.
On 4G front, I don’t expect any spectacular thing to happen in next 12 months. Refining would probably see some improvement. Their core competence is energy and they should be focusing more and more on energy.