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Refining margins lift Reliance profit above forecast

07.21.2014  | 

The company controlled by billionaire Mukesh Ambani depends on earnings from its two refineries to boost profit as gas production from its biggest deposit remains near the lowest in four years.



Reliance Industries, operator of the world’s largest oil refining complex, reported first quarter profit that beat analysts’ estimates and rose the most in a year after refining margin widened.

Net income, excluding that of units, rose 5.5% to 56.5 billion rupees ($936 million), or 17.50 rupees a share, in the three months ended June from a year earlier, Mumbai-based Reliance said on July 19. That exceeded the 53.7 billion-rupee ($0.891 billion) median profit estimate of 25 analysts compiled by Bloomberg. Sales rose 10% to 963.5 billion rupees ($15.98 billion).

The company controlled by billionaire Mukesh Ambani depends on earnings from its two refineries to boost profit as natural gas production from its biggest deposit remains near the lowest in four years. Higher profit is crucial for Reliance which is spending 1.8 trillion rupees ($0.030 trillion) to expand its polyester, petrochemicals, refining and natural gas businesses and starting a new telecommunications service next year.

“The gas business is crucial for Reliance as the outlook for refining margins in Asia is not very strong because demand is falling,” said D.K. Aggarwal, New Delhi-based chairman of SMC Investments & Advisors, which manages about $100 million of Indian shares. “Diversifying its businesses should benefit Reliance when India’s economic growth starts reviving.”

India’s gross domestic product growth forecast for the year ending March was raised to 6.3% from a 6% pace by the Asian Development Bank on July 18 on expectation the new government will overhaul policy and spur investments.

Refining Margin

Reliance earned $8.7 for every bbl of crude it turned into fuels in the quarter, compared with $8.4/bbl a year earlier and $9.3 /bbl in the three months ended March, the company said.

The company operates two refineries with a combined capacity of 1.24 million bpd located next to each other at Jamnagar in the western state of Gujarat. They have the ability to process cheaper, lower grades of crude into high-value products for use in Europe and the US.

Reliance will have to deal with a smaller refining margin as demand for fuels in Asia slows. Earnings from making diesel in Singapore, an Asian benchmark, this year will be the lowest since 2011, according to Wood Mackenzie.

Profit from making diesel in Singapore averaged $16.15/bbl in the quarter, compared with $16.52 a year earlier and $17.86/bbl in the preceding quarter, according to data from PVM Oil Associates in London. On July 9, it fell to the lowest since December 2010, according to the data.

Reliance shares have gained 9.1% this year, compared with a 21% increase in the benchmark S&P BSE Sensex. The explorer and refiner is the worst performer on the index in the past month.

Spending Plan

The company plans to spend 350 billion rupees ($5.80 billion) in the year ending March as part of its 1.8 trillion rupees ($0.030 trillion) expansion plan, CFO Alok Agarwal told reporters in Mumbai on July 19. Lower interest cost and improved refining margin in the first quarter helped boost profit, he said.

The refiner had 815.6 billion rupees ($13.52 billion) of cash and equivalents as of June 30, invested in mutual finds, government securities and deposited in banks, according to the statement. It had debt of 1.4 trillion rupees ($0.023 trillion). Finance costs declined 60% to 3.24 billion rupees ($0.054 billion) from a year earlier.

The company also produces natural gas from a field off India’s east coast with partners BP, Europe’s second-biggest oil company, and Canada’s Niko Resources. The federal government deferred a plan to raise gas tariffs by at least three months to Oct. 1 as it evaluates a formula that prices the fuel at a weighted average of prices in the U.S. and Europe and import costs in Japan and India.

KG-D6 Output

Output from the KG-D6 block fell 15% to 42 billion cubic feet in the quarter ended June from a year earlier, Reliance said. Oil production from the block dropped 1% to 530,000 bbl and condensate output increased 48% to 90,000 bbl in the quarter.

The company also operates stores that sell fruits and clothes and plans to start a fourth-generation broadband service. Reliance will start the $12 billion telecommunications network next year to meet voice and data demand in the world’s second-most populous nation, Ambani told shareholders on June 18.

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