Reliance Industries Ltd’s (RIL) September quarter results were unlikely to provide any surprises, given that the upsides for the stock will have to come from more visibility on new discoveries in the oil and gas business beyond the Krishna-Godavari (KG) D6 block.

Recently, the stock jumped on reports the company is expected to achieve peak output of 80 million standard cu. m per day (mscmd) from the KG D6 block earlier than expected. However, the outlook still remains uncertain. In a post-results conference call with the media, Alok Agarwal, chief financial officer, Reliance Industries, said that till the detailed reservoir study is completed, he cannot comment on when the production will increase to 80 mscmd.

Also See Subdued Outlook (Graphic)

In the oil and gas segment, analysts expected flat gas volumes at KG D6 and lower volumes at Panna-Mukta-Tapti. The September quarter results show that segment revenue declined by 7.7% sequentially due to lower production from the Panna-Mukta-Tapti fields. A company statement says that current production at KG D6 is around 58 mscmd against 60 mscmd at the end of June.

Panna-Mukta production was hit on account of shutdown since mid July to October 25 and Tapti production was lower due to a decline in natural reserves. As a result, Ebit (earnings before interest and tax) declined by 11% and the Ebit margin by 150 basis points compared with the June quarter.

In the refining business, the gross refining margin (GRM) was expected to increase and Reliance has not disappointed, with GRM of $7.9 (Rs 352) per barrel from $7.3 per barrel in the June quarter. The company’s GRM was at a premium to the Singapore complex margin ($4.2).

Refining business revenue declined by 1.7% but Ebit increased by 7.7% while the Ebit margin, too, improved slightly. During the quarter, RIL increased the number of its retail outlets in the country as a result of the deregulation of petrol prices.

In the September 2010 quarter, Ebit and revenue from the petrochemicals business increased by 7% and 8.5%, respectively, compared with the June quarter. The petrochemical business’s Ebit margin fell slightly as margins declined in propylene and products in the polyester and ethylene chain.

For the company as a whole, the September quarter results were in line with expectations, with revenue declining by 1.3% compared with the June quarter, while profit before depreciation, interest and tax (PBDIT) remained flat and net profits rose by 1.5%.

What of the future? In the December 2010 quarter, performance of the refining business is likely to be lacklustre. Reliance is planning to take a maintenance shutdown at the Jamnagar refinery for three-four weeks starting from October last week. Alok Deshpande of Elara Securities (India) Pvt. Ltd maintains that effectively the refinery run will decline to around one million barrels per day from the nameplate capacity of 1.24 million barrels.

“The shutdown may curtail the utilization levels to around 95-100% in Q3FY11 vis-à-vis the average 108% during the last three quarters. In terms of earnings impact, the shutdown will effectively mean a subdued Q3 FY11, toeing last few tepid quarters for the company," wrote Deshpande in a note to clients on 25 October. Margins in the petrochemicals business will remain under pressure as new capacities in West Asia and China are commissioned. However, higher production from Panna-Mukta will boost revenue from the oil and gas segment and offset some of these negatives.

Graphic by Naveen Kumar Saini/Mint

We welcome your comments at