RIL’s listed subsidiary Reliance Petroleum Ltd (RPL) is building a 580,000 barrel a day refinery in Jamnagar, Gujarat, which is currently on trial runs. The refinery is expected to start operations in the first quarter of 2009.
Output from the company’s gas find in the KG basin is also expected around the same time, provided a current ban on sales imposed by the Bombay high court is lifted.
Two of the six analysts independently put forth a more dismal motive: that the company is anticipating worse times ahead. “The company is just hoarding to get past a worse liquidity squeeze phase in the months ahead, when raising money could be harder,” one of these analysts said.
RIL is expected to incur heavy capital expenditure in continuing its oil and gas exploration activities in 30 blocks, most of them on the east coast. According to a 12 November statement on the website of Niko Resources Ltd—RIL’s 10% Canadian partner in the KG basin block—the “Phase I initial field development costs are budgeted at $5.2 billion.”
Niko had spent $353 million of the total $520 million it was to invest till 30 September, the statement said. The rest of the remaining $4.68 billion has to be spent by RIL, part of which has already been spent.
Niko added that the development plan for nine of the natural gas discoveries in the D6 block in the KG basin have also been submitted to the government which, in turn, will require more investment.
RIL had in 2007 also announced setting up “the largest integrated cracker and petrochemicals complex with a total capacity of 2mtpa” (million tonnes per annum) at Jamnagar. This cracker unit, to be built at a cost of $3 billion and expected to start in 2010-11, will use waste gases from RIL refineries and other byproducts as feedstock to manufacture ethylene, propylene and other products.
“The company could be pre-poning (bringing forward) this project or simply (setting) funds aside for it,” explained a third analyst, also part of the six analysts mentioned in the first instance.
Three of the six analysts also said the company is believed to have booked heavy losses because it bought crude oil futures at higher prices. Crude prices fell 72.88% this year after reaching a high of $147.27 in mid-July.
One analyst also said the company could be building a warchest for a big-ticket acquisition as “distress assets are aplenty” in the global chemicals market now. However, some other analysts and the two RIL executives refuted the possibility of an acquisition, saying margins were low in the business. Moreover, they argued, companies on the block could get cheaper in future.
RIL has also been stretched in the current quarter by shrinking gross refining margins, or the money refiners make by converting crude oil into by-products, and by deep cuts in the prices of key petrochemical products.
In a 3 December note, DSP Merrill Lynch (India)’s sector analyst Vidyadhar Ginde wrote that he was slashing RIL’s target share price 15% to Rs1,555 and its refining margin forecast for fiscal 2010 and 2011 by 37% and 21%, respectively. “KG D6 oil and gas and RPL are the main growth drivers.”