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Reliance Industries Ltd Overweight
RELI.BO, RIL IN
4Q in-line; Refining & petchem will be growth drivers
• 4QFY11 – in line; outlook on refining, petchem is positive: 4QFY11 net
profit of Rs53.8bn was in line with our expectations (Rs53.9bn). Refining
margins were a tad disappointing at US$9.2/bbl (US$9/bbl in 3Q) on
account of an extended secondary unit shutdown. With all units now
operational, we believe RIL is positioned to benefit from strong auto fuel
spreads, continued strength in polyester chain (with polyester/cotton
differentials at US$3000/MT) and bottoming of polymer cycle in 2011.
• E&P - less opaque, but no timelines: RIL admitted to the D6 development
being more complex than earlier envisaged, and BP's deepwater expertise
was a positive factor. RIL does not expect any downgrade to D6 reserve
numbers. Reservoir studies could take a further 6 months, but there was no
commitment on ramp-up or timelines. Management described the
engagement with DGH on D6 production as 'constructive' as all
stakeholders (including BP when it comes on board) work towards
optimizing field output, capex and recovery.
• Refining and Petchem will be near term earnings, stock drivers: RIL is
positive on transportation of fuel spreads (largely gasoil, jet fuel) in near
term and is positioned to benefit from widening light-heavy crude
differentials. Medium term, RIL sees refining environment improve for high
spec, complex refiners with indefinite delays to ME projects and Chinese
capacities focused on dom specs. High cotton-polyester price differential
provides cushion for any cotton price correction. Minimal cracker adds over
CY11-13E are setting up for strong polymer upcycle.
• Reiterate OW; PT Rs1,240: We believe the market was building in
stronger refining performance in 4Q on rising Singapore margins. We
recommend buying into any weakness caused by the market disappointment.
RIL has not participated in the rally in regional refining and petchem stocks
as markets have focused on E&P issues. With BP setting a valuation
benchmark for E&P business, we believe focus would return to refining,
petchem strength, driving stock performance. Slowing of economic recovery
is a risk to the cyclical businesses.
Key takeaways from Management meet
• E&P – KG D6 – still no timelines: RIL admitted that the D6 reservoir
development was more complex than earlier envisaged. Advent of BP into the
block was a welcome development, given their expertise in deepwater reservoir
management. RIL does not see any downgrade to their D6 reserve estimates, but
did not give any timeline for the ramp-up in production. Reservoir studies would
require 6 months per the management.
• Engagement with DGH ‘constructive’: RIL described the engagement with the
DGH on D6 production issues ‘constructive’. They cited that industry experts
had impressed on DGH that DST testing in deepwater reservoirs was
uneconomical (each test cost US$20m) and insistence on such tests would skew
block economics. RIL expect to get BP on board the D6 development soon and
will work with the stake holders to optimize the production from the fields with
minimal additional capex. RIL is looking at well recompletion and possibly
compression to enhance D6 production. The JV will look at satellite field
development as well in formulating a comprehensive plan for optimizing D6
production and reserve recovery.
• BP deal - taxation: RIL expects to pay minimal tax on the BP deal as this would
be classified as an asset sale of an intangible asset. The deal consideration would
be set off against producing properties in the books. Applicability of MAT was
as yet unclear.
• E&P – Shale Gas: RIL claimed good progress on developing the shale gas
acreage they had acquired over the last year. They were looking to prioritize the
liquid rich Eagleford shale development given the prevailing differential
between gas and crude. RIL expects the business to reach a material size by
FY14-15 (US$2bn EBITDA). Total capex so far has been US$1.7bn, with a
further $3.5bn slated over the next two years.
• Petchem – Polyester: RIL sees polyester chain profitability sustaining at high
levels. With cotton-polyester price differential at US$3000/MT, RIL believes
there is sufficient cushion to absorb some decline in cotton prices; with polyester
prices staying elevated due to cost push factors. RIL is very positive on
PTA/MEG spreads with low cap adds and continuing robust demand.
• Petchem – Polymers: RIL believes the large cap add of last year will be
absorbed during CY11...with minimal capacity adds seen over CY11-13E, RIL
believes that polymer spreads will bottom in CY11. However, with low PE
prices out of gas advantaged US facilities will likely constrain PP growth due to
substitution.
• Petchem – Expansions: Capex requirement for the announced polyester
additions would be around US$3bn; the polyester expansions would double
RIL’s existing capacities in the polyester chain over the next 2-3 years. RIL
plans a total capex of US$10bn in petrochem over the next 3-4 years (including
the offgas cracker and petcoke gasification).
• Refining – FCCU shutdown impact: RIL was not able to benefit from the strong
upswing in refining margins due to a prolonged shutdown of its FCCU unit (46
days instead of planned 37 days). In addition to the yield disruption which
lowered margins, the FCCU shutdown lowered gas availability in the refinery,
leading to higher use of costly external fuel. The RIL refinery received
3.5mmscmd of D6 gas during the quarter. Other reasons for lower than
anticipated refining margins were 1) high cost of Brent linked crudes and 2) Low
LPG and coke prices which impacted margins.
• Refining: Another major maintenance shutdown involving shutdown of a crude
train and some secondary units will be undertaken in 2HFY12.
• Refining outlook: With all units now stabilized, RIL would benefit from
anticipated strong spreads for transportation fuels. RIL expects gasoline spreads
to be robust, but expects gasoil and jet fuel spreads to be the key drivers for
refining margins. Medium term, with robust demand growth in the Eastern
hemisphere and recovery WOS, RIL sees refining environment improve for high
spec, complex refiners – supported by indefinite delays to ME projects and
Chinese capacities focused on dom specs.
• Consolidated Debt for RIL was Rs840bn; cash and equivalents on a
consolidated basis was around Rs470bn. Capex during the year was Rs118bn,
largely on E&P (Rs84bn). A settlement with companies demerged in 2005
(ADAG group) resulted in a cash outflow of around Rs5bn.
• Cash overhang: RIL management admitted that the large cash balances were an
overhang. The management was committed to investing the cash to grow
businesses. Management focus would be on cash utilization and consumer led
businesses (retail and digital) in the near term.
Polyester spreads remained robust, in the face of record high cotton prices, and the
expectation of constrained cotton supplies. PX spreads particularly rose sharply in
the quarter, due to outages in Japan, in the aftermath of the earthquake. Polyester
intermediate spreads also strengthened, allowing RIL to capture value across the
chain.
Polymers remained weak, with the capacity overhang still being digested - utilization
rates are however expected to tick up marginally this year, with a bottom in
2HCY11.
Valuations, Earnings and Risks
We reiterate our OW rating on RIL and maintain our Dec-11 PT of Rs1240. Our PT
is based on 12.5x earnings (adjusted for treasury shares), marginally higher than LT
average multiples. Key risks to our view are a renewed global slowdown affecting
the cyclical refining and petchem businesses, and a further delay in ramp-up of gas
production.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries Ltd Overweight
RELI.BO, RIL IN
4Q in-line; Refining & petchem will be growth drivers
• 4QFY11 – in line; outlook on refining, petchem is positive: 4QFY11 net
profit of Rs53.8bn was in line with our expectations (Rs53.9bn). Refining
margins were a tad disappointing at US$9.2/bbl (US$9/bbl in 3Q) on
account of an extended secondary unit shutdown. With all units now
operational, we believe RIL is positioned to benefit from strong auto fuel
spreads, continued strength in polyester chain (with polyester/cotton
differentials at US$3000/MT) and bottoming of polymer cycle in 2011.
• E&P - less opaque, but no timelines: RIL admitted to the D6 development
being more complex than earlier envisaged, and BP's deepwater expertise
was a positive factor. RIL does not expect any downgrade to D6 reserve
numbers. Reservoir studies could take a further 6 months, but there was no
commitment on ramp-up or timelines. Management described the
engagement with DGH on D6 production as 'constructive' as all
stakeholders (including BP when it comes on board) work towards
optimizing field output, capex and recovery.
positive on transportation of fuel spreads (largely gasoil, jet fuel) in near
term and is positioned to benefit from widening light-heavy crude
differentials. Medium term, RIL sees refining environment improve for high
spec, complex refiners with indefinite delays to ME projects and Chinese
capacities focused on dom specs. High cotton-polyester price differential
provides cushion for any cotton price correction. Minimal cracker adds over
CY11-13E are setting up for strong polymer upcycle.
• Reiterate OW; PT Rs1,240: We believe the market was building in
stronger refining performance in 4Q on rising Singapore margins. We
recommend buying into any weakness caused by the market disappointment.
RIL has not participated in the rally in regional refining and petchem stocks
as markets have focused on E&P issues. With BP setting a valuation
benchmark for E&P business, we believe focus would return to refining,
petchem strength, driving stock performance. Slowing of economic recovery
is a risk to the cyclical businesses.
Key takeaways from Management meet
• E&P – KG D6 – still no timelines: RIL admitted that the D6 reservoir
development was more complex than earlier envisaged. Advent of BP into the
block was a welcome development, given their expertise in deepwater reservoir
management. RIL does not see any downgrade to their D6 reserve estimates, but
did not give any timeline for the ramp-up in production. Reservoir studies would
require 6 months per the management.
• Engagement with DGH ‘constructive’: RIL described the engagement with the
DGH on D6 production issues ‘constructive’. They cited that industry experts
had impressed on DGH that DST testing in deepwater reservoirs was
uneconomical (each test cost US$20m) and insistence on such tests would skew
block economics. RIL expect to get BP on board the D6 development soon and
will work with the stake holders to optimize the production from the fields with
minimal additional capex. RIL is looking at well recompletion and possibly
compression to enhance D6 production. The JV will look at satellite field
development as well in formulating a comprehensive plan for optimizing D6
production and reserve recovery.
• BP deal - taxation: RIL expects to pay minimal tax on the BP deal as this would
be classified as an asset sale of an intangible asset. The deal consideration would
be set off against producing properties in the books. Applicability of MAT was
as yet unclear.
• E&P – Shale Gas: RIL claimed good progress on developing the shale gas
acreage they had acquired over the last year. They were looking to prioritize the
liquid rich Eagleford shale development given the prevailing differential
between gas and crude. RIL expects the business to reach a material size by
FY14-15 (US$2bn EBITDA). Total capex so far has been US$1.7bn, with a
further $3.5bn slated over the next two years.
• Petchem – Polyester: RIL sees polyester chain profitability sustaining at high
levels. With cotton-polyester price differential at US$3000/MT, RIL believes
there is sufficient cushion to absorb some decline in cotton prices; with polyester
prices staying elevated due to cost push factors. RIL is very positive on
PTA/MEG spreads with low cap adds and continuing robust demand.
• Petchem – Polymers: RIL believes the large cap add of last year will be
absorbed during CY11...with minimal capacity adds seen over CY11-13E, RIL
believes that polymer spreads will bottom in CY11. However, with low PE
prices out of gas advantaged US facilities will likely constrain PP growth due to
substitution.
• Petchem – Expansions: Capex requirement for the announced polyester
additions would be around US$3bn; the polyester expansions would double
RIL’s existing capacities in the polyester chain over the next 2-3 years. RIL
plans a total capex of US$10bn in petrochem over the next 3-4 years (including
the offgas cracker and petcoke gasification).
• Refining – FCCU shutdown impact: RIL was not able to benefit from the strong
upswing in refining margins due to a prolonged shutdown of its FCCU unit (46
days instead of planned 37 days). In addition to the yield disruption which
lowered margins, the FCCU shutdown lowered gas availability in the refinery,
leading to higher use of costly external fuel. The RIL refinery received
3.5mmscmd of D6 gas during the quarter. Other reasons for lower than
anticipated refining margins were 1) high cost of Brent linked crudes and 2) Low
LPG and coke prices which impacted margins.
• Refining: Another major maintenance shutdown involving shutdown of a crude
train and some secondary units will be undertaken in 2HFY12.
• Refining outlook: With all units now stabilized, RIL would benefit from
anticipated strong spreads for transportation fuels. RIL expects gasoline spreads
to be robust, but expects gasoil and jet fuel spreads to be the key drivers for
refining margins. Medium term, with robust demand growth in the Eastern
hemisphere and recovery WOS, RIL sees refining environment improve for high
spec, complex refiners – supported by indefinite delays to ME projects and
Chinese capacities focused on dom specs.
• Consolidated Debt for RIL was Rs840bn; cash and equivalents on a
consolidated basis was around Rs470bn. Capex during the year was Rs118bn,
largely on E&P (Rs84bn). A settlement with companies demerged in 2005
(ADAG group) resulted in a cash outflow of around Rs5bn.
• Cash overhang: RIL management admitted that the large cash balances were an
overhang. The management was committed to investing the cash to grow
businesses. Management focus would be on cash utilization and consumer led
businesses (retail and digital) in the near term.
Polyester spreads remained robust, in the face of record high cotton prices, and the
expectation of constrained cotton supplies. PX spreads particularly rose sharply in
the quarter, due to outages in Japan, in the aftermath of the earthquake. Polyester
intermediate spreads also strengthened, allowing RIL to capture value across the
chain.
Polymers remained weak, with the capacity overhang still being digested - utilization
rates are however expected to tick up marginally this year, with a bottom in
2HCY11.
Valuations, Earnings and Risks
We reiterate our OW rating on RIL and maintain our Dec-11 PT of Rs1240. Our PT
is based on 12.5x earnings (adjusted for treasury shares), marginally higher than LT
average multiples. Key risks to our view are a renewed global slowdown affecting
the cyclical refining and petchem businesses, and a further delay in ramp-up of gas
production.
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