Reliance Industries: D4 windfall?

Concerns regarding refining margins, petrochemical margins and the KG-D6 ramp-up have kept the stock range-bound.

Reliance Industries, which led the 2007 rally in the stock market, has not participated much in the recent market surge. Compared to a 150 per cent rise in the Sensex from its March 2009 low, Reliance has gained just 86 per cent. The concerns over refining margins, petrochemical margins and the KG-D6 ramp-up have kept the stock range-bound. The outlook does not change much for the next few quarters, although it has the potential to rebound over a longer term.

As KG-D6 gas capacity stays constant at 60 million metric standard cubic meters per day (mmscmd) and may take more time before reaching the peak of 80 mmscmd, the news on the potential of the D4 basin could drive the stock. Niko Resources, the Canadian major holding 15 per cent stake in the D4 basin, with Reliance holding 85 per cent, has indicated that the potential from the basin stands at 100 trillion cubic ft (tcf). This is higher than the earlier estimate and more than twice that of the D6 basin. The D6 basin find has been estimated at 40 tcf, with recoverable reserves of 11.5 tcf. Though more clarity on D4 will emerge only when drilling begins by March.

While capacities stagnate, the refining cycle has weakened since 2008. A spike in 2009 was not sustained due to uncertainties on the global scenario. Even now, the refining dynamics are not encouraging. American refiners keep adjusting utilisation levels to maintain margins and European refiners are not operating at full capacity. As the maintenance period for refiners in Asia is over, one may not witness any capacity surplus, which is not good for gross refining margins (GRMs). While analysts at Elara estimate Reliance’s GRM at $8 a barrel for the September quarter, margins for 2011-12 are estimated at $8.3 a barrel, not a major improvement.

As China and West Asia add new capacities, petrochemical margins, too, will remain under pressure during the second half of 2010-11. Hence, the stock may continue to remain subdued for some more time till the business dynamics change.