Reliance Industries’ double-digit refining margins to stay

Mumbai: Severe under-utilisation of refining assets in four countries—Argentina, Mexico, Brazil and Venezuela—and Reliance Industries Ltd’s (RIL) shift in feedstock towards ethane will boost refining margins for RIL, according to analysts. RIL exports majority of its products from its twin refineries in Jamnagar, Gujarat.

“Utilization of the Latin American refineries does not appear to be improving any time soon. This would enable RIL to continue clocking GRM (gross refining margin) of 11.5 per barrel during FY19-20,” said Motilal Oswal Securities Ltd in its report dated 13 November.

GRMs are what a company earns from turning every barrel of crude oil into fuel.Utilization of refineries in Mexico and Venezuela has been at 40% in recent months, while Argentina is at 76%, its lowest since 1996. Brazil’s refineries have seen a utilisation of 74.3%, its lowest in six years.

“Such lower utilization in these four countries alone, home to 6% of global capacity, would boost refining margins. Additionally, Africa with another 6% of global refining capacity, has also been witnessing utilization of below 70% since 2011,” the report added.

Over the past few quarters, RIL has been reporting a premium of $4-5 per barrel to the Singapore benchmark. RIL’s twin refineries at Jamnagar, with crude processing capacity of 1.24 million barrels per stream day (bpsd), provide the company with high complexity and flexibility to manage its product yield and crude oil basket better resulting in higher yield over benchmark.

A refinery’s complexity is measured in terms of Nelson Complexity Index (NCI). Refineries with a Nelson complexity of 10 or above are considered complex, which allows them to process crude that is cheaper. RIL currently has an average complexity of 12.6.

A complex refinery is one with an ability to process heavy/low quality crude that can be sourced cheaper than light or good quality crude. Last year, RIL processed 65 different grades of crude including five new grades.

Morgan Stanley in a report dated 8 November said, “Post the $25 billion investment in energy, we believe RIL can take advantage of the flux in feedstock oil, gas and coal prices. RIL’s shift in feedstock towards ethane drives margin expansion in FY19.”

In 2014, RIL decided to invest $25 billion to expand capacities in its refining and petrochemical projects. Its downstream expansion projects are likely to have their full-year operation in FY18.

“We expect these projects to add $3 billion in Ebitda by F19. Capex intensity should slow down from 2HF18, with RIL turning free cash flow-positive by mid-2018,” added Morgan Stanley. Ebitda is (earnings before interest and tax) and indicative of a company’s profitability.

RIL is switching to ethane as feed stock for its petrochemical units in Dahej, Hazira and Nagothane, which will drive up operating profit by $300 million and reduce its petrochemicals feedstock by almost a third, RIL had said this August.

The company plans to import 1.3-1.4 million metric tonnes of ethane from North America in 2017-18, Vipul Shah, chief operating officer for petrochemicals, Reliance Industries, had said on 24 August.