Reliance Set to Benefit From Rebound in Refining Margin
Reliance Industries Ltd. (RIL), operator of the world’s biggest refining complex, is set to gain on a rebound in profit from turning crude into fuel from the lowest in more than a year as the U.S. and China seek to revive growth.
Profit from turning Dubai crude into fuel in Singapore, a regional benchmark, averages $4.26 a barrel this month, compared with $3.37 in the three months ended June 30, the lowest since December 2010, according to data compiled by Bloomberg. Turning Dubai crude into diesel in Singapore is the most profitable since January, according to PVM Oil Associates Ltd., a London- based crude and refined-products broker.
Reliance, which gets more than 77 percent of its revenue from refining, reported a margin of $7.60 a barrel in the three months ended June 30. That helped it beat analysts’ estimates for net income for the first time in seven quarters even as earnings dropped 21 percent on slowing demand.
“Refining margins in Asia may have hit a bottom and could pick up before autumn,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. “Fuel demand, including from industries and agriculture, may rise as nations such as China embark on trying to boost economic growth.”
The improved margins helped the company controlled by billionaire Mukesh Ambani, beat analysts’ estimates by 2.3 percent in the three months ended June 30.
The shares have dropped 17 percent in the past year, resulting in Reliance losing its spot as India’s biggest company by market value. The stock rose 0.1 percent to 723.35 rupees as of 9:19 a.m. in Mumbai, after declining as much as 1.3 percent. The company has a market value of about $43 billion, the third- highest among India’s listed companies.
China’s Premier Wen Jiabao said last week the government will step up policy fine-tuning in the second half this year to support growth, reiterating comments made earlier this month. Federal Reserve Chairman Ben S. Bernanke said July 17 that U.S. policy makers are studying options for further stimulus.
Reliance boosted fuel sales from its adjacent refineries, capable of processing 1.24 million barrels of crude a day, by 8.5 percent last quarter to 17.2 million metric tons from a year earlier, according to a July 20 presentation on its website. Exports, which accounted for 54 percent of sales, increased 5.6 percent to 9.3 million tons.
“Oil demand should be supported by demand recovery in China,” Reliance said in the presentation. “Loosening of monetary policy in emerging economies, especially in Asia, is likely to spur demand for commodities.”
The People’s Bank of China announced a second cut in interest rates in a month on July 5 and reduced banks’ reserve requirement ratio three times since November, as the world’s second-biggest economy seeks to revive growth. The nation expanded at the slowest pace in three years last quarter. Industrial production grew 9.5 percent in June compared with 9.6 percent in May and 9.3 percent in April.
India’s industrial production rose 2.4 percent in May compared with a 0.9 percent contraction in April and 3.2 percent drop in the previous month. The Reserve Bank of India cut interest rates by 50 basis points to 8 percent on April 17.
Profit from turning Dubai crude into diesel in Singapore averages $17.40 a barrel this month, according to PVM Oil Associates. The margin widened to $18.17 a barrel on July 11, the highest in five months.
Prices of diesel, or gasoil, for loading in Singapore’s ports rose 9.7 percent this month after falling 6.4 percent in June and 13 percent in May. About 35 percent of the fuel sold by Reliance is diesel, according to Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. in Mumbai.
“The profit from diesel in Asia is already rising in July and that’s very good news for Reliance,” Choksey said. “Refining will probably lead Reliance out of the slowdown.”
Reliance reported net income of 44.7 billion rupees ($809 million) in three months ended June 30, 21 percent lower than a year earlier and the third straight quarter of declines. The profit beat the 43.7 billion rupees estimate of 28 analysts compiled by Bloomberg.
China Petroleum & Chemical Corp. (386), also known as Sinopec, is boosting crude oil production to counter losses in its refining units. The refiner, Asia’s biggest, posted a 35 percent drop in profit in the quarter ended March 31 as margins at its processing plants narrow.
Sinopec processed 109.76 million tons of crude oil in the first half of this year, up 1.1 percent from a year earlier, according to the document posted on parent China Petrochemical Corp.’s website July 20. Its gasoline output rose 7.9 percent to 19.61 million tons.
China, the world’s second-biggest oil consumer, has cut local fuel prices three times since May as crude rates declined, reducing profit for Sinopec and PetroChina Co. (857)
Brent crude has increased 10 percent this month, the first increase in four months. Higher crude prices may force China to raise fuel prices, helping revive margins, according to Kamlesh Kotak, the Mumbai-based vice president of research at brokerage firm Asian Markets Securities Pvt.
China revises gasoline and diesel prices under a system that tracks the 22-day moving average of a basket of crudes comprising Brent, Dubai and Indonesia’s Cinta. The government may change fuel rates when the measure falls or rises more than 4 percent from the last adjustment.
Brent crude and Dubai’s Fateh oil have increased 7 percent since the July 11 price cut.
“Economies, fuel demand, refining margins are still not in the best shape,” Kotak said. “There are some rays of hope, and Reliance is probably poised to take advantage of that.”
Reliance has eight sell ratings by analysts, 19 holds and 24 buys, according to data compiled by Bloomberg. The number of buy recommendations has dropped to 47 percent of the total, the lowest since March 2010.
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