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Business News/ Companies / Shale gas, petchem expansion to be profit drivers at Reliance
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Shale gas, petchem expansion to be profit drivers at Reliance

Results exceed Street estimates; major profit growth unlikely for firm until petchem capacity expansion is complete

An upside for the shale gas business is a continuous growth in its reserves, which stand at 2.66 trillion cu. ft, slightly higher than its estimated reserves in the Krishna-Godavari basin.Premium
An upside for the shale gas business is a continuous growth in its reserves, which stand at 2.66 trillion cu. ft, slightly higher than its estimated reserves in the Krishna-Godavari basin.

Mumbai: Reliance Industries Ltd (RIL) on Saturday crossed market expectations with its first-quarter results and posted its first quarterly billion-dollar profit.

However, the Mukesh Ambani-led firm may not record any major profit growth until the ongoing expansion of its petrochemical production capacity is complete, analysts said.

A possible surprise could be RIL’s shale gas business in the US, which overtook its domestic exploration and production business in terms of revenue in the quarter ended June.

“RIL’s decent performance during the quarter has largely been the result of lower depreciation and interest cost. However, in petchem, it is too early to expect a sustained recovery in demand and margins as demand still remains a concern. Any weakness in demand could impact a sustained margin recovery," Dhaval Joshi, an analyst with brokerage Emkay Global Financial Services Ltd, said in a report after the company’s results.

He said RIL’s profits will not change substantially in the next few quarters as a major earnings driver—petrochemical expansion—will be complete only in late 2015-16.

Company officials, too, agreed that benefits from the petrochemical expansion will not reflect anytime soon.

Answering questions from the media after the earnings announcement on Saturday, chief financial officer Alok Agarwal said the firm’s various expansions are coming on stream in a staggered manner, but the major benefit from them will reflect on the balance sheet only by the end of 2015-16.

“Refinery off-gas cracker and petcoke gasification are the two main projects which can add substantially to the bottom line (profits)," he said. “They will come on stream only by 2015-16."

The off-gas cracker process produces ethylene, which is used as a raw material for other products.

Petcoke gasification will reduce RIL’s dependence on external natural gas to run its refinery.

RIL is spending $8 billion, or 48,000 crore, to expand the aggregate capacity of its 20-odd petrochemical products by 66%. The products include ethylene, polyethylene or polythene (PE), paraxylene (PX) and purified terephthalic acid (PTA).

The expansion is being brought online in a staggered manner till 2016-17.

Once complete, RIL will be among the top five producers of most of these products, which are used mainly to produce plastics, paints, coatings, adhesives, ink, textiles, etc.

An analyst with a domestic brokerage said RIL has quietly grown its overseas portfolio, especially in the exploration and production of shale gas in the US.

“This portfolio is growing rapidly with operating profits from the business having risen 320% and revenues have jumped 55%. Going forward, this can turn out to be huge for the firm," the analyst said, adding shale gas and petchem could be the company’s main businesses to look out for. He did not want to be named.

In the June quarter, RIL and its joint ventures posted a total output of 48 million metric standard cu. m per day (mmscmd), with RIL’s contribution at around 14-15 mmscmd, higher than the company’s domestic production.

The US shale business also surpassed the revenue of the domestic oil and gas business for the first time with sales at 1,617 crore, 55% higher from the year ago period and almost 4% more than domestic revenues which stood at 1,557 crore.

“We will continue to grow by 20% in revenue, profits and volumes at least for the coming few quarters based on the drilling plan estimates that we have in the US," Agarwal said.

He further said the company has already crossed investments beyond $7 billion in the shale gas business so far.

The commissioning of these new capacities, coupled with the cost benefits of liquified petroleum gas substitution in the Jamnagar complex, will contribute a major portion of the estimated 11,000 crore ($1.8 billion) addition to consolidated Ebitda (operating profit) by 2015-16, with improvement from shale and some retail earnings also supporting operations, an IDFC Ltd report said in June.

Another upside for the shale gas business is a continuous growth in its reserves, which stands at 2.66 trillion cu. ft, slightly higher than the company’s current estimated reserves in the Krishna-Godavari basin.

This enhances the long-term production outlook for the business, said analysts.

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Published: 20 Jul 2014, 11:49 PM IST
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