Brent prices averaged $55.9/bbl for Q3FY09, a decline of 53% from 2QFY09, while Singapore complex refining margins averaged $3.95/bbl as against $7.52/bbl in Q2FY09.
This highlights the sharp sell-off in commodities and the pressure felt by refiners due to demand destruction in the key markets of USA and EU.
We expect Reliance Industries (RIL) to report refining margins of around $9.50/bbl on lower oil prices.
The petrochemical business has seen naphtha prices for Q3FY09 declining by 60% from Q2FY09, while product prices have declined by 54% over the same period.
We expect a ~32% decline in EBIT for the refining and petchem business. We will be pleasantly surprised if RIL is able to weather the slowdown, in which case we will be revisiting our estimates.
We would recommend investors to wait for the 3Q09 results due to negative headwinds around the stock.
During the quarter, we expect possibility of inventory losses; refinery utilization, oil production at KG D6 post the stoppage, update on gas pricing and other income as a result of cash infusion from the warrant conversion.
The recent news regarding NTPC being asked to buy the gas from RIL at $4.20/mmbtu as against $2.34/mmbtu is encouraging from RIL’s point of view as that assists them in their proceedings against RNRL.
We have conservatively assumed pricing of $2.34/mmbtu for the first 40mmscmd of production and $4.20/mmbtu for the balance. We note that if RIL wins the case, our FY10 goes up by 21% and FY11 EPS go up by 17%; target price increases by 7%.
We reduce our target price slightly to Rs1,322 / share from Rs1,354/share, primarily due to revision of crude and currency estimates. Our FY10EPS declines by 7% to Rs118.67/share for the consolidated business.
We continue to be wary of the steep downturn in commodities and resultant impact on RIL. The near-term catalyst continues to be the resolution of the gas dispute.