Visit http://indiaer.blogspot.com/ for complete details RIL--------Maintain OUTPERFORM
With macro risks on refining, clarity on near-term gas volumes is important
● Our calculated RIL spot margin is up US$0.4/bbl QoQ in 2Q
FY11; the model using 1M lagged crude prices is up US$2.6/bbl
QoQ due to the upward movement in crude. RIL’s hedging
policies will determine how much of these gains they are able to
book in 2Q FY11.
● RIL’s 1Q FY11 GRM came in below FY11 forecasts, margins
must be higher in 2H to meet expectations. Diesel cracks typically
go up towards year end on winter heating demand, helping
margins. Forecasts however, are for a particularly warm winter in
the US now; and natural gas prices are at lows. Winter demand
disappointments can pose a risk to RIL’s FY11 GRM estimates.
● Global oil demand growth is a key variable for FY12 estimates –
we forecast RIL GRM increasing US$1.2/bbl YoY. The IEA
estimates 2011 demand will grow US$1.2mb/d if global GDP
grows 4% and only 0.4mb/d if growth is 3%.Refining margins continue a slow climb up
Calculated 2Q FY11 3-1-2-0 margins are up about 40 cents to
US$11.6/bbl QoQ and about US$3/bbl from the lows in 2Q FY10.
Increasing diesel cracks (up ~US$5/bbl YoY in 2QFY11) have more
than made up for falling gasoline cracks (down US$1.3/bbl YoY);
benefitting complex refiners such as RIL, which run diesel heavy
slates. Light – Heavy crude oil spreads (AL-AH) are also up $1.1/bbl
YoY. Our model for RIL’s refining using spot crude is up a similar 40
cents per barrel, while that using one-month lagged crude prices is up
US$2.6/bbl QoQ for 2Q FY11. RIL’s hedging strategies will determine
how much of the margin increase they are able to book in 2Q, but we
note that reported margins outperformed calculations during the down
turn, and may tend to underperform them for some time.
RIL’s GRM in 1Q was below full-year estimates. Distillate cracks tend
to increase end of year on winter heating demand; which could have
helped RIL GRM catch up. Bloomberg reported on 25 August that the
US would likely have its warmest winter in five years (according to
forecaster MDA Federal Inc.). Natural gas prices are well below oil
parity levels and will compete for heating demand. If the winter
disappoints, there is risk that RIL’s FY11 GRM may miss expectations.
Margin growth beyond depends on demand strength
We model RIL GRM increasing US$1.2/bbl YoY in FY11. While there
is still some growth in global refining capacity due (driven by China
and India), the strength of global oil demand recovery presents a key
risk to reduction in global refining spare capacity. The IEA estimates
oil demand will grow about 1.2mb/d in 2011 if global GDP grows 4%,
and only 0.4mb/d if growth was lower at 3%. A majority of global GDP
growth is expected to come from non OECD, emerging economies. A
slow down in Chinese growth can be a key risk to refining margin
forecasts.
● Refining driven earnings upsides are still at risk. RIL’s recent
guidance of 60 mmscmd KG D6 production has risked volume
growth as well. Clarity on near-term gas volumes is needed to
reduce earnings risks, which can help the stock.
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