Refining margins may boost RIL, ONGC net

Refining margins may boost RIL, ONGC net
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First Published: Tue, Jul 22 2008. 11 35 PM IST

Subsidy shadow: ONGC drilling platforms at Bombay High. The firm is expected to post a 13% rise in profit. (Photo: Bloomberg)
Subsidy shadow: ONGC drilling platforms at Bombay High. The firm is expected to post a 13% rise in profit. (Photo: Bloomberg)
Updated: Tue, Jul 22 2008. 11 35 PM IST
Mumbai: India’s top petrochemicals maker and oil refiner, Reliance Industries Ltd, or RIL, is forecast to report on 24 July a modest 14% rise in quarterly net profit as its petrochemical business clips the pace of earnings growth despite strong refining margins.
Subsidy shadow: ONGC drilling platforms at Bombay High. The firm is expected to post a 13% rise in profit. (Photo: Bloomberg)
Analysts expect RIL, India’s biggest private company with a market value of $73 billion (Rs3 trillion), to benefit further from robust refining margins and natural gas sales this year.
Oil and Natural Gas Corp. Ltd, India’s No. 1 oil producer, is expected to report on 28 July 13% growth in net profit. The state-run firm is bound by the government to sell oil at lower prices to state refiners.
Analysts highlighted risks for the sector as high oil prices could curtail demand.
“Future earnings of oil and gas companies are at risk due to risk to refining and petchem margins on account of demand destruction from high crude prices and uncertainty on subsidy sharing, especially if crude prices remain firm,” Amit Mishra, analyst at ICICI Securities, said in a note.
Reliance is, however, expected to get a boost and produce up to 80 million cubic metres of gas a day from its fields in the Krishna-Godavari (KG) basin off India’s east coast by September. “That would be significant. Gas sales should start chipping in significantly from the third quarter, boosting profitability,” said Rohit Nagraj, a oil and gas analyst at Angel Broking Ltd.
Reliance Petroleum Ltd, in which Chevron Corp. owns 5%, is expected to commission its 580,000 barrels per day refinery around September, adding to the company’s revenue and profit. Reliance Petroleum is 70.4% owned by RIL.
Net profit at RIL, controlled by Mukesh Ambani, is seen at Rs4140 crore in its fiscal first quarter ended June, up from Rs3,630 crore reported a year ago, a Reuters poll of 10 analysts showed.
Reliance has notched up more than 20% net profit growth in the last four quarters. Its refining margins are forecast at $15-$18.5 a barrel, double the benchmark Asian crack margin on Dubai crude that averaged about $8 a barrel in the quarter, and compared with $15.4 a year earlier.
This is because RIL’s 660,000 barrel per day refinery in western India, which contributed 64% of its revenue in the March quarter, can process cheap high sulphur crude to produce high value products.
Analysts said operating margins of the petrochemical business, which contributes a third of RIL’s revenue, are likely to be under pressure as prices of inputs such as naphtha rose 54% in the quarter, faster than product prices.
ONGC, which produces 80% of India’s crude, has to sell oil from its domestic output at huge discounts to state-run refineries to keep retail prices low. Analysts estimated ONGC sold oil at $62-$68 a barrel to local refiners against the global average of $123 in the quarter. ONGC’s crude is benchmarked to Nigeria’s Bonny Light. Brokerage Motilal Oswal Securities Ltd said it expected ONGC to have offered discounts worth Rs9,670 crore for the quarter, more than double the Rs3650 crore it gave in the year-ago period.
However, analysts said ONGC’s earnings will get a boost in the coming quarters from higher production from its overseas assets that can be sold at world prices. ONGC Videsh Ltd, its overseas investment arm, owns stakes in oil and gas blocks in Myanmar, Sudan, Russia, Venezuela, Vietnam, Egypt, Qatar and Brazil. It has qualified for development of Iraq’s oil reserves. Shares in Reliance fell 7.6% in the June quarter, compared with a 14% drop in the broader market index and a 10% fall in the sector index. ONGC’s shares fell 17%.
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First Published: Tue, Jul 22 2008. 11 35 PM IST