Crude impact: Integrated model may aid RIL growth, despite refining woes

Reliance Industries Ltd, which operates the world's largest single-location refinery, is facing certain difficulties. While the gross margin of its refining business hit a multi-year low, the petcoke gasification plan is stuck with a ‘scaling up’ hurdle. 

Also, part of its margin upside prospects hinges on timely implementation of new regulations for bunker fuel.

For the September 2018 ended quarter, RIL reported a gross refining margin (GRM) of $9.5 per barrel. The company last reported a single digit GRM in the December 2014 ended quarter.

“A tight crude market has reduced RIL’s competitive advantage of sourcing difficult-to-process cargoes as the premium on these items has come off,” analysts at JP Morgan wrote in a recent note on the company.

The benchmark Singapore refining margins, to which RIL enjoys a premium, has also been under pressure. “Singapore refining margins have been particularly weak this month as gasoline cracks slumped in line with weakness in the US and Europe but should improve over the next couple of months as demand picks up seasonally,” said Platts Analytics, a provider of energy and commodities information.

A lot also depends on how crude oil prices move from here on, as well as demand from customers.

Rahul Prithiani, director with CRISIL Research, said the rise in crude oil prices will have a further impact. “Rise in crude oil prices is expected to impact GRMs of refiners if high crude oil prices can't be passed on to end consumers. Moreover, sluggish growth in demand for petroleum products alongside supply glut in the Asian market is expected to put further pressure on the GRMs of Indian refiners.”

The JP Morgan analysts note that in the current scenario, IMO 2020 and the gasifier are extremely important for RIL’s FY20-21 earnings and de-leveraging.

However, there are some uncertainties on both counts. Closer home, RIL at present, is facing concerns on the scale-up of its ambitious petcoke gasification project. The company informed analysts that there have been technical challenges in the continuous synchronised operations of petcoke gasifiers. 

The company hopes the problem will be over by March next year. The project, once fully operational, is expected to add $2 per barrel as GRMs for the company.

Both RIL’s management and analysts expect the IMO regulations to further add to RIL’s earnings. 

The JP Morgan report hopes IMO 2020-related earnings before interest, taxation, depreciation and ammortisation (Ebitda) addition will be at Rs 32 billion and Rs 59 billion in FY2020 and FY2021, respectively. But delay in implementation of these regulations could curtail the expected upside. 

The United States is reported to have proposed certain changes to the implementation of these rules. However, not everyone is concerned on what stand the US takes.

“The global refining industry and the shipping industry have invested good amount of resources to comply with the new regulations on time. They have been preparing for it for a few years now. Companies will aim to comply, although the level of implementation may vary from country to country,” said Sambit Mohanty, senior Asia oil editor at S&P Global Platts.

However, not everyone is worried but is hopeful RIL’s integrated model will save the day. 

“If one was to look at the company’s earnings between 2009 and 2015, it is clear that RIL managed to expand earnings (now in the range of Rs 300 billion or above in the last three years), either through good refining performance or through petrochemicals. RIL’s integrated model helps it ride commodity uncertainties and that should continue,” said an oil and gas analyst, who did not wish to be identified.

Moreover, on a consolidated basis, consumer businesses such as telecom (digital services) and retail have started to deliver. 

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