Fall in profits: Reliance's Krishna Godavari basin facility
A SLUGGISH global economy has slashed oil refining margins of India’s Reliance Industries, leading to a fourth straight fall in profit and adding to concerns for investors already unnerved by a gas-pricing dispute.
Reliance Industries, controlled by billionaire Mukesh Ambani, is embroiled in a high-profile legal battle over a deal to sell gas to Reliance Natural Resources, led by Ambani’s estranged younger brother Anil, at below the price set by the government.
A ruling by India’s top court, which is currently hearing the dispute, will determine whether Reliance Industries stands to make or lose billions of dollars through sales of gas from its find in the Krishna Godavari (KG) basin off India’s east coast.
“Till the top court gives its final judgement, investors will be faced with uncertainty,” said AN Sridhar, fund manager at Sahara Mutual Fund, which owns Reliance stock.
Jitters surrounding the case have weighed on the company’s shares, which are down 15 per cent since mid-June when it received an unfavourable ruling from a lower court. The main index has risen more than 5 per cent in that time.
Results at Reliance Industries, which has interests in petrochemicals, refining, oil and gas exploration, and retail, have been dented by shrinking refining margins and lower demand for petrochemicals in the wake of the global economic downturn.
India's most valuable listed company reported a fourth straight decline in quarterly profit, although it still met market estimates.
“The outlook for the refining segment is not very great at the moment,” said Deepak Pareek, an oil and gas analyst at Angel Broking. “Demand for key products needs to improve.”
Analysts had expected business to improve once Reliance Industries began pumping gas from the KG basin, where it made India's largest gas discovery in 2002.
But the company is producing only about 60 per cent of its 60 million standard cubic metres a day (mmscmd) capacity, and so has been missing out on $100m (£60.5m) in monthly revenue since May.
Further, it will not hit peak gas output of 80 mmscmd until April 2010, three months later than expected.
The government has the power to decide who buys gas and at what price. It had initially selected customers for only 40 mmscmd of gas from India's biggest gas find, and allocated more supplies on Tuesday (October 27).
Analysts say this could prompt Reliance to ramp up production, but weakness in the firm's flagship petrochemical and refining businesses may still weigh on results.
“The growth that you are seeing worldwide is just not enough for refining margins to improve immediately,” Sridhar said.
A recent firming in oil prices, linked to petrochemical rates, and a pick-up in demand in Asia are bright sparks, but recovery in the key US market is still mired in uncertainty, global chemicals firms such as Saudi Basic Industries Corp (SABIC) have said.
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