Reliance Profit Growth May Peak on Failure to Raise Gas Output
Reliance Industries Ltd chairman Mukesh D. Ambani. Photographer: Adam Berry/Bloomberg
Earnings growth at Reliance Industries Ltd., India’s largest company by market value, may slow from the fastest pace in more than two years as the company falls behind schedule to increase gas production, investors said.
Net income in the three months ended June 30 surged 32 percent from a year earlier to 48.5 billion rupees ($1 billion), the energy explorer and refiner said yesterday. Profit rose 3 percent from the previous quarter as Reliance failed to boost natural gas output, said Deven Choksey, chief executive officer at K.R. Choksey Shares & Securities Pvt. The shares fell.
The company based in Mumbai expects to increase output by 33 percent to 80 million cubic meters a day at India’s largest gas field as late as 2012, two people with knowledge of the plan said yesterday, at least two years behind schedule. Chairman Mukesh Ambani, Asia richest man, may step up acquisitions as gains from gas sales and oil refining slow.
“With current gas production and refining profits remaining stagnant, Reliance will look to new acquisitions for growth,” said Vikas Pershad, chief executive officer of Chicago-based Veda Investments LLC in Chicago, which owns Reliance shares. “Ramping up gas production has been slower than expected.”
The billionaire has stepped up acquisitions after ending a family dispute with his estranged brother, Anil Ambani, over gas supply from India’s biggest field. Reliance bought shale gas assets in the U.S. from Atlas Energy Inc. and Pioneer Natural Resources Co. this year and plans to build power plants.
Acquisitions, Expansion
Reliance also acquired Infotel Broadband Services Ltd., which has licenses to provide wireless services across India, in June and Mukesh told shareholders the company is planning large investments in power, including nuclear and solar energy.
Reliance, which has the biggest weighting in India’s benchmark Sensitive Index, declined the most in almost two months in Mumbai. The stock fell 3.1 percent to 1,021.25 rupees, the biggest drop since June 1. The shares have declined 6.4 percent this year while the index gained 2.8 percent.
Gas production at the field began on April 2 last year and output doubled in a year to about 60 million cubic meters a day. P.M.S. Prasad, the head of Reliance’s oil and gas business, said in March 2009 that the field would reach maximum output by the end of that year. Jitin Prasada, India’s junior oil minister, told parliament in December that the peak rate of 80 million maybe reached by the middle of 2010.
Gas Production
Production will remain at the current level until Reliance completes a review of the reservoir and the company’s safety procedures, Chief Financial Officer Alok Agarwal said yesterday at a media briefing on the first-quarter earnings. He declined to give a timeline for increasing output.
Increasing gas output to the peak level would add $1.1 billion in revenue each year, based on current prices of the fuel in India.
“Unless Reliance can boost production in the coming quarters there is an increasing risk that they miss earnings expectations for this year,” Neil Beveridge, an analyst at Sanford C. Bernstein Ltd. in Hong Kong, said in a report. The reservoir may be more complex than initially expected, he said.
Profit may rise 40 percent to 226.7 billion rupees in the year ending March 31, according to the mean estimate of 19 analysts compiled by Bloomberg before the yesterday’s report.
‘Dilute Returns’
“While U.S. shale gas and broadband represent new growth opportunities for Reliance, we remain concerned that these initiatives will dilute overall returns and strategic focus of the group,” wrote Beveridge, who rates the shares “market perform.” “Despite these negatives, Reliance will be drilling some high impact deep water exploration wells in the KG (Krishna Godavari) and Mahanadi Basins, which we remain positive on.”
Reliance said in December it found more gas in the Bay of Bengal’s Krishna-Godavari basin and is evaluating the commercial potential of the find.
Reliance said it earned $7.3 on every barrel of crude it turned to fuels in the quarter compared with $6.8 a barrel a year earlier. Global refining margins, or earnings from processing oil into fuel, rose to $5.49 a barrel in the three- month period from $3.08 a barrel in the quarter ended March 31, according to data compiled by BP Plc.
Gains from processing oil into fuels may remain stable in the next three quarters, Aggarwal said yesterday.
Net sales in the quarter rose 86.7 percent to 582.3 billion rupees, its highest ever in a three month period, Reliance said in the statement. Sales from the company’s two refineries more than doubled to 505.3 billion rupees from 244.3 billion rupees.
To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net
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