Mumbai: Weak refining margins will dent quarterly results at Reliance Industries, and a rise in gas production at a field off India’s east coast and the resolution of a gas pricing row are key to future performance.
Billionaire Mukesh Ambani-controlled Reliance Industries and Reliance Natural Resources, led by younger brother Anil Ambani, are embroiled in a legal battle over the terms of a deal to sell gas to Reliance Natural at below the price set by the government.
“Most analysts have assumed Mukesh will be able to sell the gas at the government approved price of $4.2 per mmBtu,” said R K Gupta, managing director of Taurus Mutual Fund.
“If the court decides otherwise, there could be a significant impact on Reliance’s future results,” said Gupta, whose holdings include several oil and gas stocks, including Reliance.
Reliance Industries, which has interests in oil and gas exploration, petrochemicals, refining and retail, began pumping gas from its find in the Krishna Godavari basin in April, and this was expected to help it offset shrinking refining margins.
But the company has said it is producing only about 60% of its 60 million standard cubic metres a day (mmscmd) capacity, leading to the deferral of $100 million in monthly revenue from May, and a delay in peak gas output of 80 mmscmd by at least a quarter until April.
Reliance Industries imports liquefied natural gas at about $9 per million metric British thermal unit (mmBtu) to power its refinery in western India, a much higher price than if it were allowed to receive gas from its own field.
The government selects customers for the gas pumped by Reliance, which sells it at the state approved price of $4.2 per mmBtu. India has selected customers for only 40 mmscmd of gas.
In December, Reliance commissioned a new 580,000 barrels per day (bpd) refinery next to its older 660,00 bpd plant at Jamnagar, making it the world’s largest refining complex.
Analysts said Reliance’s gross refining margins (GRMs), a key measure of profitability, would have more than halved to $6.6 per barrel in the September quarter from a year earlier, tracking the decline in Asia’s benchmark Dubai crack margin.
“Refinery margins are important, but more important will be the future production from the KG gas basin,” Gupta said.
Reliance Industries’ second-quarter results will include those from recently acquired Reliance Petroleum, and so will not be comparable to last year’s figures.
State-run explorer Oil & Natural Gas Corp is expected to report net profit rose for the first time in five quarters, on an easing in its subsidy sharing burden.
The firm is required to partially subsidise the sale of fuel to state-run retailers, who sell fuel at government-set, below-market prices, which affects its profit.
Lower oil prices compared with a year earlier will help the company, which contributes about two-thirds of India’s oil output, even though demand for crude oil has not risen significantly, analysts said.
“Lately, oil prices have started going up again,” said Gupta, who also owns ONGC shares. “This may again hurt earnings in the future.”