Petrochem pick-up, shale asset sale to prop Reliance earnings: Analysts

Ahead of the shareholder meet on Friday, analysts expect the recent events involving refining-to-retail major Reliance Industries, such as the $1-billion sale deal of shale gas assests in the US and improving margins in oil and petrochem business, to improve earnings in the medium term.

"The transaction (shale gas asset sale) alleviates the recent market concerns on the value of RIL's shale assets, following sharp correction in international oil and US 'Henry Hub' prices," said analysts at Edelweiss Securities.

"The agreement will provide meaningful economic benefits, further improving cost competitiveness of the Eagle Ford (EFS) upstream joint development operations," the investments-related research and services firm said.

On June 1, the company had said that it has entered into a deal to sell its stake in its US-based shale gas operations for $1.07 billion.

Reliance Holding USA, a subsidiary of Reliance Industries, had entered into definitive agreements for the sale of its entire holding of 49.9 percent in EFS Midstream to an affiliate of Enterprise Products Partners.

Macquarie Capital Securities described the deal as attractive, considering the fact that RIL had spent just $46 million to acquire the asset and invested an additional $208 million on it.

"RIL's shale gas assets in the US have been bearing the pain of weak oil and gas prices. The EFS assets will gain from the deleveraging resulting from the sale," Macquarie Capital said.

According to Barclays, the deal represents a successful outcome for Reliance - much like the $7.2 billion sale of its domestic assets to BP in 2011.

"The sale effectively quintuples its investment in five years with higher returns on the $46 million equity invested by Reliance for this venture," Barclays said in its analysis about the deal.

Barclays also pointed to future opportunities for the company through the deal, as it has also entered into a 20 year utilisation agreement with EPD, including seven years minimum volume commitment.

The earnings are also expected to improve on the back of a robust GRMs (gross refining margin) and improving petchem segment's performance cited Antique Stock Broking.

The broking firm estimated a continuation of over $10 GRMs in the medium-term, which is 15 percent higher than the consensus.

"We expect the petchem earnings to improve significantly, driven by the expanded volumes and sharp up-tick in polymer and polyester deltas. Integrated players like RIL are expected to benefit as chain deltas improve," Antique Stock Broking said.

Kotak Securities said that the return ratios will improve, driven by the strong earnings accretion from the company's core-business projects.

The company nears completion of a significant capital expenditure cycle over the next 12 months. The company is erecting a 'petcoke' gasification project which will also reduce cost of energy for refineries.

RIL is also extended to commission ethylene and polyester projects in the next 12 months. The company will be using refinery off-gases as feedstock for producing 1.4 mtpa of ethylene and 0.2 mtpa of polyester.