Oil prices: Heating up

The GRMs have been high globally due to shutdown of several refining facilities

The high crude oil prices and a shortage in refining capacity are forcing the Street to have a closer look at the gross refining margins (GRMs) of domestic refiners.

The GRMs have been high globally as several refining facilities in East Asia have been shut over the past few weeks on account of maintenance activities.

Analysts at domestic brokerage houses are estimating the GRMs of Reliance Industries at $14-$15 a barrel compared with the regional benchmark Singapore refining margin of $8 a barrel last month.

RIL is doing better than the regional benchmark due to its ability to process heavy and sour crude, coupled with the higher product prices of petroleum products in the overseas markets. The company’s GRMs were $13.6 a barrel in Q2 FY08.

Public sector oil marketing companies such as HPCL and BPCL are also understood to be leveraging this upturn, with estimated GRMs of $7-$8 a barrel. HPCL’s gross refining margins at its Mumbai refinery were $6.26 a barrel in the first half of FY08.

However, the oil marketing companies are grappling with under-recoveries on the auto fuels, kerosene and LPG front due to the government’s reluctance to hike retail prices.

At the end of the first week this month, under-recoveries of diesel were estimated at Rs 8-Rs 9 a litre, according to analysts. The upstream oil players such as ONGC and Gail are expected to partially share these under-recoveries through the subsidy sharing formula.

RIL trades at 30 times estimated FY08 earnings and 23 times FY09 earnings due to its expansion plans in oil exploration and retail. BPCL, on the other hand, gets a discounting of 9 times estimated FY08 earnings and 9.5 times FY09 earnings, given the uncertainty regarding its subsidy burden.

Source - Business Standard

Reliance Petroleum Limited (RPL) - A Speculators Den

Recently I came across an article published in "Hindu Business Line" dated Nov 1st' 2007 with title "Reliance Petro beats M-Cap of all refiners put together" (www.thehindubusinessline.com/ 2007/11/01/ stories/2007110152540100.htm). The article actually surprised me and prompted me to look at the reasons for Investors (rather Speculators) giving such huge valuation to an company which is about to be operational in mid of 2008.

Eventually, I was not able to figure out the reason, for a stock which can be currently either Operated by the promoter itself or driven high by a broker under the influence of the promoter. I really don't have anything against the promoters, infact I respect their business model to a great extent and really value what reliance has added in fueling the Indian Economy.

The company has been given a valuation almost around 2.5 times (at the time of writing this article) to that of India's largest refinery Indian Oil Corporation (IOC). Is this Justified?. Let me further compare both IOC and RPL fundamentally and see if such huge valuation of RPL is justified

1) RPL is going to be operational with 29 million metric tonne per anum (MMTPA) during mid of 2008 as compared to IOC's existing refining capacity along with it's group companies of 60.2 MMTPA (47.35 MMTPA on a standalone basis).

2) IOC as a company is involved in manufacturing of well established Oil products like Lubricants, LPG, Industrial Fuels etc as compared to none of RPL to date.

3) RPL's earning visibility is a black box until operational as against IOC's sales turnover of US $5.1 billion.

Who's Buying RPL?

Based, on the latest shareholding pattern of Sept' 07 the mutual fund's were net sellers on RPL (Compared to Jun'07). Their holding decreased to 28.1 million shares from 44.4 million shares.

FII's pared exposure to RPL shares. Their holding was reduced from 137 million shares to 102 million shares.

Similar is the case with Financial Institution, which currently holds around 132 million shares as compared to 162 million previous quarter.

Insurance companies shed around 8 million shares from it's portfolio.

Having all Institutions being net sellers, I examined the details further on who actually is making RPL stock to touch higher levels every alternate day..

There were 400 shareholders added to those holding greater than one lakh in share capital. Their holding increased from 32.3 million shares to 49.4 million shares. Now surely this additional 400 investors are either brokers or HNI's manipulating the prices of RPL. Say at a average price of Rs. 150/- per stock the Investor has to invest atleast 1.5 million rupees to buy excess of one lakh in share capital which surely cannot be a retail investor.

What's in it for reliance?

This is purely my imaginary guess that the company may be planing to sell some shares to Institutions and want better valuation to pocket.. Or maybe brokers want to make huge profit. who knows?. Indian markets in many cases have been a black box and it is the insider's who gets benefited from these stocks. It is very late before the news reaches the retail investor.

Maybe the stock may hit new highs in the days to come and can even be another Unitech or Jai Corp in place, but my advise to retail investors is to invest with caution. Invest only if you are an Investor with high risk profile.

To finish, RPL's current valuation is almost 4 times it's total project cost without even a single penny generated. Who will get such a high valuation?