Oil rally to benefit RIL’s petrochemical portfolio

Oil rally to benefit RIL’s petrochemical portfolio

The recent rally of global crude oil prices may have made India’s downstream players jittery but stronger crude prices are expected to improve the economics of Mukesh Ambani-led Reliance Industries’ petrochemical projects, according to Mumbai-based brokerage and financial service firm Edelweiss.

“RIL has already commissioned major projects—paraxylene (2.2 Million Tonne Per Annum), US ethane imports- and is set to commission petcoke gasification ($5 billion each) over the next 6 months. Recent projects are sensitive to oil price as per our sensitivity analysis a 10% rise in oil price will boost RIL’s FY20E Earnings per Share (EPS) 3-4%. The recent rally in oil price has improved the economics of these projects,” the firm said in a research report.

The private sector oil major earlier this week also commissioned the world’s largest 1.5 MMTPA Refinery Off-Gas Cracker (ROGC) at Jamnagar, almost concluding its massive $20 billion petrochemical expansion plan.

“ROGC (1.5MMT) is one of the most profitable projects amongst RIL’s USD20bn core investments. We estimate project Return on Capital Employed (RoCE) of 21% (USD1.2bn EBITDA) assuming revised oil price estimate of USD60/bbl (USD56/bbl earlier),” the research report said.

According to Edelweiss, RIL’s strategy to integrate the petrochemical plant with its existing Jamnagar refineries will provide a sustainable cost advantage to the company making the ROGC competitive with crackers in Middle-East and North America which have feedstock cost advantage.

According to an official release issued by RIL, the ROGC complex will use off-gases from RIL’s two refineries at Jamnagar as feedstock. Also, Ethylene from ROGC will be used in downstream plants to produce Mono-Ethylene Glycol (MEG) and Polyethylene.

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The company added that Propylene from ROGC will also enhance output of the company’s existing Polypropylene (PP) plants at Jamnagar complex which will be used to produce high-value copolymers.

“Of RIL’s grandiose USD50bn capex, effectively doubling gross block, over 45% was incurred towards core business—refining and petrochemical. The highly profitable mega projects: 1) US ethane imports (USD1.5bn, Q1FY18); 2) off-gas cracker (USD4.5bn, Q4FY18); and 3) petcoke gasification (Q4FY18, USD5bn) will further enhance GRMs and petrochemical margins.

According to the brokerage firm the petrochemical and downstream projects are positively leveraged to oil prices and are likely to increase the company’s overall earnings sensitivity to oil prices. It adds that the competitiveness of the core petrochemical and downstream projects along with the company’s existing upstream business will be further enhanced due to recovery in oil prices.

RIL’s share price at the Bombay Stock Exchange (BSE) today closed at Rs 923.00, up 0.30 per cent as compared to previous close. Read More

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