Flexibility in its crude and product slate and risk management make for higher-than-expected refining margins
RIL (Reliance Industries)
reported consolidated net profit of Rs 67.5 bn (up 8% q-o-q; up 13%
y-o-y), ahead of street estimates. Consolidated Ebitda (earnings before
interest taxes depreciation and amortisation) was Rs 107 bn (up 5%
q-o-q; up 9% y-o-y) The company delivered higher-than-expected refining
margins ($10.6/bbl – at multi-year highs), taking advantage of
flexibility in its crude and product slate, while also benefitting from
risk management.
The company continues to build towards the roll-out of Jio’s services, with the imminent launch of a range of 4G smartphones under the ‘Lyf’ brand aimed at helping build an ecosystem of handsets compatible with the full range of Jio’s services.
Refining margins surprise on the upside: RIL reported GRMs (gross refining margins) of $10.6/bbl (at six-year highs), that were higher q-o-q (quarter on quarter) despite lower regional benchmark margins (RIL GRMs $4.3/bbl higher than Singapore benchmarks), with advantaged crude sourcing, a flexible product slate allowing maximising of gasoline production, and weaker fuel oil cracks and robust risk management. Refining Ebit (consol) was at R54.6 bn (up 4% q-o-q; up 42% y-o-y).
Product slate flexibility sees gasoline output rise: RIL maximised gasoline output, highlighting the flexibility of the refinery’s product slate. RIL produced c.4MMT of gasoline and alkylates during the quarter, to take advantage of elevated gasoline cracks. RIL stated that demand in the US was the highest since 2007, with unplanned refinery outages and low prices. The company was also able to export additional volumes (particularly alkylates) to the US as a result. The company also switched seamlessly to producing larger quantities of ULSD (ultra low sulphur diesel), with the market for 500ppm diesel more muted.
Advantaged crude sourcing, falling fuel oil cracks aid margins and
premiums vs benchmarks: RIL continues to retain flexibility on the crude
diet as well, becoming the first major refiner to utilise Basra Heavy
crude. As a result, RIL was able to take advantage of significant
discounts to OSPs. In addition, with the Brent-Dubai spread compressing
during the quarter, RIL sourced additional Brent linked crudes, allowing
for a higher premium vs Singapore benchmarks (Singapore benchmarks are
calculated vs Dubai crude).
Risk management helps refining earnings: RIL highlighted that robust and proactive risk management aided margin performance—we see a likely usage of forward selling, particularly on middle distillates which could have aided margins.
Domestic marketing aid margins, while inventories are a drag: In addition, domestic marketing margins also contributed (albeit a small quantum) to GRMs, with RIL also capturing market share in the bulk diesel sales segment. Bulk and own marketing sales stood at 3.3MMT (own marketing at c1.6MMT). The company stated that inventory losses (due to a fall in commodity prices during the quarter) were a drag on margins.
Petcoke gasification project operational by end CY16, profitability remains attractive: The company stated that it would begin a phased start-up of the gasification units in early CY16, and while the company did not specify firm timelines, the company expects the project to be fully operational towards the end of CY16.
‘Lyf’ 4G smartphones to be launched shortly, aim to create handset ecosystem for Jio: RIL will shortly launch a range of 4G smartphones under the ‘Lyf’ brand. The price will range from entry level for 4G (R400-6000) to c.R20,000+. The smartphones will be VoLTE and VoWiFi enabled, and are part of RIL’s attempt to create a handset ecosystem that is fully compatible with Jio services .
Jio network tests continue, launch dates still to be announced: Network tests on Jio continue, with initial results positive. The company and RCOM have filed intimation with the DoT for sharing of 800MHz spectrum in seven cities. The company reiterated that it intends to launch services, without elaborating an exact timeframe.
Petrochemicals performance improves q-o-q with strength in polymers: Polymer demand remains strong, as per the company, with PE deltas remaining above five-year averages due to robust buying (Indian demand has been higher than anticipated as well). PP spreads remain elevated due to soft feedstock prices. With low commodity prices, the company expects CTO/MTO projects in Asia to potentially see delays. Polyester remains softer, with volatile prices driving cautious downstream buying. RIL stated that it sees inventories at Asian polyester producers being at low levels, with Chinese demand remaining weak.
D6 production remains muted, with additional testing underway; CBM start up by end Q3FY16: D6 production for the quarter was subdued, at 11.4mmscmd (flat q-o-q). Two workovers/sidetracks in the D1-D3 area were put on production in July, and are now yielding c.1mmscmd. The DSTs on the D29 and D30 discoveries have been completed, with appraisal activities also under way in the MJ-1 discovery. The company expects first gas from the CBM project by end 3QFY16, with the Shahdol-Phulpur evacuation pipeline almost complete as well.
Cost management a key focus in shale: With falling commodity prices impacting shale earnings adversely, the company reiterated that it is looking to aggressively manage costs, while taking advantage of falling services costs as well. Production has been curtailed in the Carrizo JV to preserve value, while the company has increased rig efficiency in the Pioneer venture, thereby reducing costs.
Balance sheet items: The company incurred capex of c.Rs 200 bn during the quarter, with Rs 80 bn spent on Jio, and a similar amount on the downstream businesses. Consolidated net debt rose to Rs 870 bn, from Rs 834 bn last quarter.
The company continues to build towards the roll-out of Jio’s services, with the imminent launch of a range of 4G smartphones under the ‘Lyf’ brand aimed at helping build an ecosystem of handsets compatible with the full range of Jio’s services.
Refining margins surprise on the upside: RIL reported GRMs (gross refining margins) of $10.6/bbl (at six-year highs), that were higher q-o-q (quarter on quarter) despite lower regional benchmark margins (RIL GRMs $4.3/bbl higher than Singapore benchmarks), with advantaged crude sourcing, a flexible product slate allowing maximising of gasoline production, and weaker fuel oil cracks and robust risk management. Refining Ebit (consol) was at R54.6 bn (up 4% q-o-q; up 42% y-o-y).
Product slate flexibility sees gasoline output rise: RIL maximised gasoline output, highlighting the flexibility of the refinery’s product slate. RIL produced c.4MMT of gasoline and alkylates during the quarter, to take advantage of elevated gasoline cracks. RIL stated that demand in the US was the highest since 2007, with unplanned refinery outages and low prices. The company was also able to export additional volumes (particularly alkylates) to the US as a result. The company also switched seamlessly to producing larger quantities of ULSD (ultra low sulphur diesel), with the market for 500ppm diesel more muted.
Risk management helps refining earnings: RIL highlighted that robust and proactive risk management aided margin performance—we see a likely usage of forward selling, particularly on middle distillates which could have aided margins.
Domestic marketing aid margins, while inventories are a drag: In addition, domestic marketing margins also contributed (albeit a small quantum) to GRMs, with RIL also capturing market share in the bulk diesel sales segment. Bulk and own marketing sales stood at 3.3MMT (own marketing at c1.6MMT). The company stated that inventory losses (due to a fall in commodity prices during the quarter) were a drag on margins.
Petcoke gasification project operational by end CY16, profitability remains attractive: The company stated that it would begin a phased start-up of the gasification units in early CY16, and while the company did not specify firm timelines, the company expects the project to be fully operational towards the end of CY16.
‘Lyf’ 4G smartphones to be launched shortly, aim to create handset ecosystem for Jio: RIL will shortly launch a range of 4G smartphones under the ‘Lyf’ brand. The price will range from entry level for 4G (R400-6000) to c.R20,000+. The smartphones will be VoLTE and VoWiFi enabled, and are part of RIL’s attempt to create a handset ecosystem that is fully compatible with Jio services .
Jio network tests continue, launch dates still to be announced: Network tests on Jio continue, with initial results positive. The company and RCOM have filed intimation with the DoT for sharing of 800MHz spectrum in seven cities. The company reiterated that it intends to launch services, without elaborating an exact timeframe.
Petrochemicals performance improves q-o-q with strength in polymers: Polymer demand remains strong, as per the company, with PE deltas remaining above five-year averages due to robust buying (Indian demand has been higher than anticipated as well). PP spreads remain elevated due to soft feedstock prices. With low commodity prices, the company expects CTO/MTO projects in Asia to potentially see delays. Polyester remains softer, with volatile prices driving cautious downstream buying. RIL stated that it sees inventories at Asian polyester producers being at low levels, with Chinese demand remaining weak.
D6 production remains muted, with additional testing underway; CBM start up by end Q3FY16: D6 production for the quarter was subdued, at 11.4mmscmd (flat q-o-q). Two workovers/sidetracks in the D1-D3 area were put on production in July, and are now yielding c.1mmscmd. The DSTs on the D29 and D30 discoveries have been completed, with appraisal activities also under way in the MJ-1 discovery. The company expects first gas from the CBM project by end 3QFY16, with the Shahdol-Phulpur evacuation pipeline almost complete as well.
Cost management a key focus in shale: With falling commodity prices impacting shale earnings adversely, the company reiterated that it is looking to aggressively manage costs, while taking advantage of falling services costs as well. Production has been curtailed in the Carrizo JV to preserve value, while the company has increased rig efficiency in the Pioneer venture, thereby reducing costs.
Balance sheet items: The company incurred capex of c.Rs 200 bn during the quarter, with Rs 80 bn spent on Jio, and a similar amount on the downstream businesses. Consolidated net debt rose to Rs 870 bn, from Rs 834 bn last quarter.
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