Can RIL sustain double digit growth in gross refining margin?

In the June quarter, Reliance Industries earned $11.5 from every barrel of crude oil it processed


Reliance Industries Ltd (RIL) operates the world’s biggest single-location refinery, with the technology to process cheaper, heavier crude.
Reliance Industries Ltd (RIL) operates the world’s biggest single-location refinery, with the technology to process cheaper, heavier crude.

Mumbai: Reliance Industries Ltd (RIL) comfortably beat analysts’ projections to record a sterling refining margin in the June quarter. Will it sustain that performance?

In the three-month period, India’s largest private petroleum refiner earned $11.5 from every barrel of crude oil it processed. The so-called gross refining margin (GRM) was about $2 more than what analysts estimated and $6.5 higher than a Singapore refining benchmark. The firm claims this is its highest premium against the Singapore benchmark in eight years.

Not everyone expects an encore.

“This beat in RIL versus benchmarks cannot be extrapolated. Hedging gains can last for a limited period. Inventory gains will not recur (if oil remains flat). Core weakness can affect RIL refining profits,” Bank of America Merrill Lynch said in an 18 July report.

In the April-June quarter, Singapore GRMs stood at $5 per barrel. In the past, RIL has reported a $2-3 premium to Singapore GRMs.

Bernstein Research had a similar view. In a 16 July, its analysts said, “Reliance reported that $2/bbl of the $6.5/bbl premium over Singapore was driven by hedging and inventory gains, which are unlikely to be repeatable.”

However, the firm itself has been optimistic. “We are going to see volatility in GRMs; but, more structurally, we believe refining should be strong and constructive as refinery capacity additions continue to be small,” Srikanth Venkatachari, joint chief financial officer, RIL, said at a press conference on 15 July.

The better-than-expected GRM this quarter is attributable to a number of factors including RIL’s risk management strategy and inventory gains, which added $2 per barrel to the GRMs.

According to Bank of America Merrill Lynch, “RIL suggested that even though crude throughputs are down 1 million tonnes (mt) quarter-on-quarter (due to the shutdown of one of its 4 crude distillation units), product sales were flat sequentially. Thus, a small portion of higher underlying GRM of 4QFY16 may have flown into 1QFY17.”

In the March quarter, RIL’s GRM stood at $10.8 per barrel.

Besides inventory gains, the company attributed the higher GRMs to the weakness in fuel oil cracks (the difference between the price of crude oil and petroleum products extracted from it).

RIL produces a negligible amount of fuel oil, due to which a weakness in fuel cracks is favourable for RIL’s refining margins. An improvement in gasoil cracks during the quarter also supported RIL’s GRM.

“RIL is smart in changing its production slate and has traditionally enjoyed a premium of $3.5 per barrel to Singapore benchmark GRMs. Going forward, this may continue,” said S.P. Tulsian of SP Tulsian.com, an investment advisory.

RIL operates the world’s biggest single-location refinery, with the technology to process cheaper, heavier crude.

This also allows it to change its product slate (the ability of a refinery to vary its production of output) depending on market demand and the properties of the crude being refined. The company is expanding its refining and petrochemical capacity at a cost of $38 billion, spread over 3-5 years. These downstream expansion projects are likely to have their full-year operation in FY18.

“Over the next six-to-nine months, RIL should commission projects with investments of $38 billion (75% of RIL’s market cap). Commissioning of petcoke gasifier should be in the second half of FY17 and ethylene off-gas cracker in 3QFY17,” said Deutsche Bank Market Research in a 16 July report.

RIL has invested in petcoke gasification to meet its entire fuel requirement at the refineries and eliminate its petcoke production of 6.5 mt a year, generated from two of its cokers.

The technology for petcoke gasification will help RIL produce 23 million standard cu. m a day of syngas—a fuel gas mixture—and cut the use of regasified liquefied natural gas.

“We expect RIL’s GRM to improve by another $2/bbl, once it completes its ongoing projects within the energy business by fiscal 2017, while the Singapore complex is expected to remain range-bound within $5-6/bbl over the next four-to-six months,” said Moody’s Investors Service in a 19 July report.

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