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RIL has managed to stem the decline in Oil and gas revenues and profit

There are a number of positives in Reliance Industries(RIL) September 2013 numbers which has led to analysts upgrading the company’s results. However, what seems to standout is that the decline in its Oil and Gas revenue and profit seems to be arrested. 

 

For the first time since the company reported problems in its gas production, the company has managed to show higher revenues in its quarterly numbers from the division as compared to its previous quarter. 

 

Peak revenue from the oil and gas division had touched Rs 4,665 crore on which the division made an earnings before interest and tax (EBIT) of Rs 1,921 crore, way back in June 2010. Since then, gas production has been on a decline and revenue contribution from the division touched a low of Rs 1,454 crore in June 2013 and profit of Rs 352 crore. 

 

For the first since the decline started, the company has not only shown an uptick, though marginal, in revenue but also in its profits simultaneously. For September 2013, revenue from oil and gas touched Rs 1,464 crore and profit at Rs 356 crore. 

 

These numbers to some extent corroborate with the company’s statement earlier in the month where they said that they have been able to stem the fall in its gas production from KG-D6 basin. However, in the September 2013 quarter, the company had produced 45.4 billion cubic feet of gas (BCF) as compared to 49.2 BCF in the first quarter of the current fiscal. Oil production was flat, while contribution from other wells in India has declined too. 

 

On a quarterly basis, though the company discloses its revenue and operating profit from Shale gas operations in the US, these are not included in the results as the company only gives out audited numbers. 

 

The only reason that the company has shown higher numbers is because of rupee depreciation. Reliance, like other explorers gets its revenue from oil and gas in dollar terms, thus it is able get the benefit of currency depreciation. 

 

Clearly, the rate of decline in production has stalled, even though it might not rise anytime soon, it is unlikely to decline further. But the biggest benefit that the company will get even from this low production is that it can still generate profits near that of its peak level if price increase as recommended by Rangarajan is followed. 

As per the pricing formula, Reliance might get upward of $8.5 per mmscmd (more than double the current rate) once the formula is implemented. Thus even if production remains same, its revenue will double and as the incremental increase will be without any increase in cost, the entire benefit will percolate down to its EBIT level. 

 

Oil & gas: Revenue and Profit
__ Profit __ Revenue

Hypothetically speaking, at the current exchange rate and rate of production, the company can post revenue of Rs 2,928 crore but its profit will shoot to Rs 1,820 crore, the second highest level of profit it ever made from the division. This alone can boost Reliance’s profit before tax by 30 per cent. 

 

Even after the Lehman crisis, most of the frontline stocks have managed to touch a new high, Reliance has languished over the past five years. Its fortunes are directly proportional to the outcome of its oil and gas division. Now that the decline of oil and gas is almost under control, the uncertainty is taken care of. If anything, oil and gas will only give positive surprises. 

 

Is it reason enough to add Reliance to your portfolio then, given the high sensitivity of the division to its profit? Take your call.