The Mukesh Ambani-led Reliance Industries beat Street estimates of its earnings in the first three quarters of 2015-16 because of its strong refining margin, which was higher than the Singapore benchmark.
The October-December quarter saw RIL’s gross refining margin—earnings from turning every barrel of crude oil into fuel—increasing to $11.5 per barrel from $10.6 in the same period of 2014-15. The share of refining earnings before interest and tax rose to 67.2 per cent from 49.9 per cent in the year-ago quarter.
RIL told analysts in a financial presentation a major reason for this was the reduction in the cost of its crude basket cost. “Crude sourcing and grade switching flexibility helped RIL outperform,” RIL, which has the ability to process cheaper inferior crude, said.
State-owned oil companies by comparison have older refineries, which makes a big difference to their operational metrics. Also, they buy crude from national oil companies through tenders, while private players can seek out discounts.
“Sourcing from more proximate Middle Eastern crude suppliers was maximised, shifting away from Brent-linked crude,” RIL said. It also switched to contracts that provided for more than one grade of crude.
Exports dipped two per cent quarter-on-quarter but RIL took advantage of robust local demand. “Increased bulk and retail sales resulted in lower export volume quarter-on-quarter,” RIL said. Brent crude averaged $43.7 per barrel during the quarter compared to $76.3 per barrel in the corresponding period of the previous year.
The firm in its presentation added the strong gross refining margin was likely to sustain with no new refinery capacity being added in the next few years. Besides, with old refineries operating at strong utilisation levels, the risk of unscheduled shutdowns rises.
RIL saw record crude processing at an operating rate of 116 per cent during the quarter, up from 114 per cent in the same period a year ago. Average utilisation rates for refineries are 86.8 per cent in North America, 85.4 per cent in Europe and 84.1 per cent in Asia.
Most brokerages have a positive view on the stock with about half or 11 firms increasing their target price post the results. While some believe the intensity of capex is expected to ease going ahead, others indicate that the refining margin momentum could continue. Earnings are expected to be boosted by lower oil prices, higher Saudi official selling prices discounts and lack of new refinery capacity.
The consensus 12-month analyst target prices complied by Bloomberg is Rs 1,164.55, implying a 16 per cent upside from current levels. Before the result announcement the target was Rs 1,139. the firm’s share on Wednesday fell 3.76 per cent to end at Rs 1,004.35 against a 1.7 per cent fall in the benchmark indices. JM Financial, HSBC, Citi and JP Morgan are among the brokerages that upped their price target on the stock following the result.
With the company planning to commission its $5 billion petcoke gasification facility by early 2016, the gross refining margin will become healthier.
RIl is investing $16 billion in expanding petrochemical production. Of this, $4.6 billion is for a project to convert captive petcoke to synthetic gas; $4.5 billion for a refinery off-gas cracker to extract ethane, ethylene, propylene, butanes and propanes; $5 billion to expand polyester production; and $1.5 billion to import ethane from the US to replace costly propane imports and naphtha.
The firm wants to eliminate its petcoke production of 6.5 million tonnes a year. “The technology for petcoke gasification, which will help us produce 23 million standard cubic metres a day of synthetic gas, will aid in reducing the intake of regasified LNG,” a RIL executive told Business Standard recently.