Pumping up RIL's profits PDF Print E-mail
Saturday, 20 July 2013 00:00
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Shobhana's edit

US shale operations more profitable than KG Basin

Reliance Industries Limited’s (RIL) has managed to post profits of R5,352 crore, up 19% yoy for the three months to June 2013, but much of this is thanks to more other income and lower depreciation; the operating profit has increased by just 4%. The key refining piece is under some pressure; although Gross Refining Margin of $8.4 per barrel for Q1FY14 have risen yoy, they have slipped sharply sequentially. The petrochemicals business too reported flat revenues and margins. While the KG Basin gas continues to do badly and production has fallen to a mere 14 mmscmd, its share of overall EBIT was just 6.7% in Q1FY14 as compared to 19.8% a year ago; what is interesting is the continued profitability of the US shale operations—for the first time, RIL’s EBITDA here is higher than that for the Indian E&P operations.


The turnaround of the domestic E&P business is critical for RIL. While the Reliance stock moved up 15% after the CCEA agreed to Rangarajan’s formula to price gas for the domestic market (right now, this translates to a hike in gas prices from $4.2/mmBtu to $6.83/mmBtu), RIL officials have made it clear the company is unlikely to make significant investments unless the sale price is increased to around $8-10/mmBtu. RIL has already made an investment of over $21 billion in the E&P space—if you include $8 billion of financing costs and $3.5 billion in wells that yielded nothing—but recovered $9 billion. So the company is already out of pocket and won’t gain much from the higher Rangarajan prices unless it invests more—and it won’t invest the $10 billion more it needs to unless gas prices are freed up, or unless prices of crude oil globally fall enough for capital expenditure costs to fall sufficiently.

As for RIL’s telecom foray, now that it has completed some tie-ups with existing telcos for renting towers and undersea cables, a large part of the telecom piece is complete—what’s left is either a takeover of an existing 2G telecom player for the underlying voice network or perhaps a tie up for roaming minutes with existing players. Getting the business to be profitable will take some years, given the well-entrenched nature of the competition and the fact that the existing 4G business is relatively untried. While RIL has scaled up its retailing business to over R10,000 crore, the business contributes little to the company’s valuation—barely 2% of the estimated sum-of-the-parts value for FY14. So, for the conceivable future, RIL’s future lies in what happens to gas prices.

Inside page story

With production at RIL’s KG Basin continuing to drop, to below 14 mscmd, the company’s profits from the US shale investments have now become larger than those from the KG Basin. RIL’s exploration and production (most E&P revenues are from the KG Basin) revenues for Q1FY14 were R1,454 crore compared with R2,508 crore in Q1FY13 while Ebit was R352 crore versus R972 crore a year ago. By comparison, US shale revenues were R1,215 crore in Q1FY14 versus R721 crore a year ago and Ebitda was R937 crore in Q1FY14 versus R517 crore a year ago.

While RIL doesn’t report Ebitda for its E&P business, analysts put the Q1FY14 number at R750 crore based on the likely depreciation norms for the E&P business. In which case, while RIL’s likely Q4FY13 Ebitda from Indian E&P operations was R970 crore and higher than that for the US shale business’ R854 crore, this has reversed in Q1FY14 — likely E&P Ebitda was R742 crore versus R937 crore for the US shale business, which is around two-year old.

RIL’s investments in US shale, its Q1FY14 media release says, are $6 billion as of date. The company’s KG-D6 Basin investments are $10 billion — in addition, another $3.5 billion was spent on other blocks where no gas was found; company officials say another $8 billion of financing costs need to be added to this. Compared with this, it has recovered $9.2 billion from gas sales so far.

Though RIL has drawn up ambitious investment plans of $6 billion for other blocks in the KG Basin — in addition, the company estimates a financing cost of $3.5 billion and opex of $6 billion — a lot depends on the price of gas.

Company officials say it is still in the red on existing operations — it has recovered under half of what it has spent so far — and will not invest in new operations unless gas prices are raised to between $8 and $10 per mmBtu.

If that is not done, this means shale operations will continue to be more profitable than the Indian E&P ones for many years to come.

In its annual report for FY13, the company noted: “With improvement in the US gas prices and continued focus on the liquids-rich acreage in the Eagle Ford area, Reliance is expected to grow this business sustainably over the next few years.” RIL has three joint ventures (JVs) for production of shale gas in the US with Pioneer Natural Resources, Carrizo Oil & Gas and Chevron.

Production from the KG-D6 basin is expected to average 14-15 mscmd in Q1FY14, down 4-5 mmcsd from Q4FY13 and lower than the average output of 26 mscmd in fiscal 2013.

In FY13, gas production from KG-D6 plummeted nearly 40% to 336.0 Bcf from 551.3 Bcf a year earlier. Production has also been falling at the company’s Panna-Mukta and Tapti fields.

RIL currently sells gas at $5.73 per mmBtu from the Panna-Mukta fields, $5.57 pre mmBtu from Tapti and $4.20 per mmBtu from KG-D6.

Last Updated ( Tuesday, 15 October 2013 00:45 )

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