Reliance Industries - Strong refining and petrochemicals:: Standard Chartered Research

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Reliance Industries
Strong refining and petrochemicals compensate for weak E&P volumes


 Results were in line with estimates. Pick-up in refining
margins compensated for lower volumes while higher
petrochemicals/polyester margins and volume growth
continued. Polyester chain performance was especially
strong, aided by high cotton prices.
 E&P EBIT hit by lower oil and gas volumes at KGD6
even as lack of clarity on ramp up gets extended
 Reiterate IN-LINE as we see limited triggers (MND4
drilling timelines likely pushed back). Risks to earnings
are balanced (potentially slower gas ramp-up offsetting
any upside in refining and petrochemicals in FY12)



3Q earnings in line with estimates – RIL’s 3Q earnings
of Rs51.3bn (up 28% yoy, 4% qoq) and operating profit at
Rs95.5bn (up 22% yoy, 2% qoq) was in line with our
estimate.
Recovery in refining…  Refining EBIT at Rs24.4bn (up
77% yoy, 11% qoq), was driven by recovery in GRMs –
US$9/bbl vs. US$7.9/bbl in 2Q FY11 despite lower
volumes (16.1MT vs 16.9MT for 2Q FY11) given 22 day
maintenance shutdown at old Jamnagar facility. Differential
over Singapore GRM remained steady at ~US$3.5/bbl.
….alongwith strong petchem… Petrochemicals EBIT at
Rs24.3bn (+11% qoq) was supported by demand and
volume growth (post 2Q shutdown) and strong margins
(esp. in polyester chain). Polyester chain profitability
remained strong led by higher cotton prices as well as
robust domestic demand. This, coupled with higher PP
margins, aided the performance. Overall, despite 8%
addition to global polymer capacity, the demand growth in
Asia led to improvement in Asian operating rates to 87%.
 compensated for declining E&P EBIT – E&P EBIT….
declined to Rs15bn (-12% qoq) as KGD6 volumes came off
to 54.5 vs ~59mmscmd in 2Q, however, Panna-Mukta
volumes ramped up post lengthy shutdown. Tapti gas
production at 655mscm was down 6% yoy and 3% qoq on
the back of ageing reservoir.  
Maintain IN-LINE – Pick-up in refining and petchem
profitability is being counter balanced by E&P uncertainty.
We maintain IN-LINE.

 Key takeaways from the analyst meet
 Regarding the discussion and studies on D6 production, the company did not provide
any specific guidance. Since the discussions are on multiple issues viz. production
levels, additional wells, reservoir performance and ongoing audit, it could take some
time for clarity to emerge. Total investment in D6 to date is US$7.8bn.
 As of now, D6 is producing 52-55mmscmd of gas with D1/D3 producing 43-45mmscmd.
Production from D1/D3 is down from the peak of 55mmscmd. Oil production is also on
the lower side at 17.5kbpd.
 There has been no discussion on any risk to 2P reserves of 10tcf in D1-D3, however, so
far and a continuous assessment of 1P reserves is being done.
 Drilling schedule in MN-D4 has still not been firmed up. Given the recent spate of
disappointments in E&P, we believe that postponement of drilling in D4 is a dampener.
 For the Jamnagar refineries, 55-60% of the gas requirement, ie, 4.5-5.0mmscmd is
being sourced through spot LNG.
 Management was confident of petchem/polyester sustaining their strong performance in
the near to medium term given strong demand growth, improving utilisations and rising
cost of substitutes viz. cotton.
 The zero date for the new ethylene cracker project has not been set and it will take 42-
48 months to implement.
 Cash capex during the quarter was Rs19bn, 90% of which was in E&P.