RIL: Performance of refining segment offsets decline in oil & gas

Gross refining margins fall to $8.3/barrel; light-heavy crude oil differential remains strong

Reliance Industries (RIL)’ new core is helping it offset the steady decline in the oil & gas business. The company’s performance during the quarter ended September hasn’t come as a surprise, as the 1.7 per cent year-on-year growth in net profit is broadly in line with the Street’s estimates. However, what surprised many was the refining segment, which fared well, even as crude prices fell during the quarter.

As crude oil prices weakened and the benchmark Singapore gross refining margins (GRMs) declined 19 per cent sequentially to $4.7/barrel, the Street was expecting a sharp fall in RIL’s refining margins, too. Lower crude prices have undoubtedly impacted RIL but the damage has largely been restricted to revenue. The company reported a 4.3 per cent fall in consolidated sales for the quarter, owing to lower volumes and weaker crude prices, but the refining segment’s margins have held strong. The company’s GRMs fell marginally to $8.3/barrel from $8.7/barrel in the June quarter and 7.7/barrel in the corresponding quarter last year.

The company’s refining segment has performed well, thanks to the price differential between Arab Light and Arab Heavy crude oil, which remained stable at $4.8/barrel on a sequential basis. For the corresponding quarter last year, the differential stood at $3.8/barrel. As RIL is a complex refiner and can process heavy crude oil, it benefits when the differential widens.

The petrochemicals segment, too, fared well, with margins improving both sequentially and annually. Though revenue from the petrochemical segment declined marginally to Rs 26,651 crore, the segment’s earnings before interest and tax was flat at Rs 2,361 crore on an annual basis, as margins improved. While year-on-year margins remained flat, sequentially, earnings jumped 26.7 per cent due to a strong rebound in margins for polymers, fibre intermediates and aromatics.

The oil & gas business continues to be a drag. While revenue from the segment declined 12 per cent annually and 5.5 per cent sequentially to Rs 3,002 crore, earnings before interest and tax 14.5 per cent annually and 21.5 per cent sequentially to Rs 818 crore, as margins fell to 27.2 per cent from 35.6 per cent a year ago and 32.8 per cent in the June quarter. The shale business in the US performed well at the earnings level, though revenues fell. RIL said while revenue growth was hit sequentially, operating profit from the business were steady, owing to lower operational expenses across joint ventures.

Though the numbers have several positives, analysts expect a strong revival in earnings only from FY17.