India's Reliance Industries Lowers Gas Output

Brian Hicks

Written By Brian Hicks

Posted July 23, 2012

India’s natural gas outputs are declining rapidly, and the companies reflect it. Reliance Industries Ltd. (BOM: 500325), which is India’s largest company and runs the world’s largest oil-refinery station, saw profits fall for a third straight quarter.

Reliance’s net income was 44.7 billion rupees, or $809 million, in the quarter ending June 30. This is a drop of 21 percent, but it still exceeds Bloomberg’s median estimate of 43.7 billion Indian rupees, or roughly $781 million.

Much of the slowdown is attributable to the worldwide economic problems, particularly the Eurozone’s debt issues. In addition, the recent slowdown in Chinese economic growth has meant fuel demand has gone down, thereby bringing down refining margins for several companies including Reliance and China’s China Petroleum and Chemical Corp (SHA: 600028).

Another factor hurting Reliance’s bottom line is the rapidly-decreasing price difference between lighter crude oil and heavier crude. Light crude is often more expensive than heavy crude, but the gap is narrowing.

In the quarter ended June 30, for example, the difference between Brent crude and the heavier Dubai crude was $2.53 per barrel compared to $6.06 last year for the same time period. That decreased even further to $1.37 as of June 12.

Juergen Maier, fund manager at the Viennese Raiffeisen Capital Management, told Bloomberg:

“Operations are still weak and the outlook for gas output and refining continue to be difficult. Globally economies are slowing down, which makes it difficult to improve the margin for refining.”

Analysts are not all that confident about Reliance, since the number of buy recommendations has decreased to its lowest since December of 2010—at about half of its total.

This quarter, Reliance has marked profits of $7.6 per barrel of crude that it converted into fuels. Last year, the number was $10.3 per barrel.

Reliance is fighting to make a comeback and overhaul its operations. It will spend $8 billion to expand current petrochemical capacity, and another $4 billion will go toward a plant for creating a combustible gas that will fire refineries.

In addition, Reliance Chairman Mukesh Ambani stated that Reliance would reduce its dependence on imported gases, which are quite expensive, and focus on increasing the company’s refining margin by 40 percent over the next three years.

Reliance currently has 3.7 trillion cubic feet of proven reserves, but gas output from its KG-D6 field in the Bay of Bengal dropped 33 percent this quarter due to “technical difficulties.”

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