'RIL's pretty close to the bottom of the cycle now'

Reliance Industries’ refining margins could pick up to $7-9 a barrel next year and then back up to $11-12 a barrel by 2011, says Neil Beveridge, analyst, Sanford C Bernstein. In an interview to ET NOW, Mr Beveridge says that an adverse ruling in the company’s ongoing legal battle with RNRL could knock off Rs 150-200 off RIL’s stock price. Excerpts:

How do you read RIL’s financial performance for the second quarter?

RIL’s earnings were pretty much in line with our expectations. What you saw was a weak performance in refining with margins down from $13 per barrel to $6 per barrel, partly offset by the ramp up of KG-D6 gas production and strong performance from the petrochemical segment.

The bulk of RIL’s exploration acreage is in the offshore space, deepwater, where costs are high. Do you see that as a disadvantage for the company?

The costs of exploration are significant but deepwater is also where the highest returns are to be made. In deepwater, there is opportunity of significant discoveries and as well as high production rates.

Analysts have assigned significant valuations to RIL’s oil & gas portfolio, of which D6 is just one part. There was also the recent news of the company abandoning an exploratory well in the D9 block. How does this affect the overall picture?

Yes, Reliance has reserves in several blocks including D6. We estimate they have about 1.5-2 billion barrels of contingent resources that are not on the books yet. We would value these reserves at $1-2 per barrel. Clearly, if Reliance can find another Dhirubhai in the acreage it holds, that would be a catalyst for a significant upside.

A big overhang on RIL’s stock price is the ongoing court case. What is the possible impact of a negative outcome?

The worst case is that they would be forced to supply gas at $2.34 to RNRL as well as NTPC. This would mean a revenue loss of Rs 75,000 crore. The share price could be hit by Rs 150-200.

Refining still accounts for the bulk of RIL’s business — what kind of margins do you see for the company over the next few years?

We are pretty close to the bottom of the cycle now. I would expect to see refining margins pick up to $7-8-9 a barrel next year and then back up to $11-12 a barrel by 2011.

We understand you have made a presentation to the RIL board very recently. What was it all about?

We have been talking to Reliance just about the future potential of deepwater, the longer term value of the acreage that the company holds. That is one of the key points with the stock in terms of the upside potential for Reliance.

So Reliance will be drilling 12 new deep water exploration wells over the next 12 months. We have to wait and see what is delivered there but clearly still significant upside with the exploration portfolio.

Source: ET

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