Hurricane Harvey to push RIL’s refining margins
Mumbai: Hurricane Harvey has disrupted the global refining and chemical industry, impacting margins. This, however, will work in favour of Reliance Industries Ltd (RIL).
According to a Morgan Stanley Research report, refining margins are reaching cycle highs, and chemical margins recovering to mid-cycle.
“Near-term supply disruptions are likely to drive higher energy earnings from tight global demand supply balances as margins remain on an uptrend. Every 10% rise in refining and chemical margins has an 8-12% impact on RIL’s earnings,” said Morgan Stanley Research in a report dated 4 September.
The report added that while RIL’s ethane imports are likely to be affected due to lower ethane availability from the US, feed stock flexibility (switching to propane) and its integration with the refining business should help mitigate the impact to a large extent.
“We expect windfall profits in the upcoming earnings season. More importantly, these trends should sustain in 2018 implying earnings surprises again driven by energy,” the Morgan Stanley report added.
Gulf Coast represents a major hub for the production of refining and chemicals products and with the US being a net exporter of refining and major chemical products, supply disruption is ensuing.
Singapore complex refining margins are at yearly highs of $10.5 per barrel with third quarter (to-date) margins at $7.9 a barrel, averaging 20% higher.
Chemical margins for key products are up 8-25% quarter-on-quarter.
In a separate report released on Tuesday, Deutsche Bank Markets Research said that the hurricane’s impact on downstream capacities for RIL should support margins in 2018.
“Asian refining margin was already strong until the disruption from Hurricane Harvey (2QFY18 average of $7.7 per barrel until 24 August), and it has surged higher to $11 a barrel on 1 September. The disruption to refining infrastructure is a loss in supply that should inevitably lead to tighter global stocks supporting refining margins into 2018,” said Deutsche Bank Markets Research.
The petchem segment contributes 31% to RIL’s Ebitda (earnings before interest, tax, depreciation and amortization), whereas the refining segment contributes 54%.
“We expect midstream polyester margins to rise 25% in 2017-18 after increasing by nearly 30% year to date, driven by supply rationalization and increasing balance sheet challenges faced by major players in Europe, North America and India,” said Morgan Stanley.