Bloomberg News

Ambani Armed With $12.6 Billion Cash as Oil Valuations Drop

October 17, 2011

(Updates with share decline from fifth paragraph.)

Oct. 17 (Bloomberg) -- Billionaire Mukesh Ambani’s Reliance Industries Ltd. is poised to use its record cash for overseas acquisitions to take advantage of the cheapest valuations of oil and natural gas companies in three years as profit growth slows.

“Reliance has a strong balance sheet and sustained earning base to pursue growth opportunities,” Chairman Ambani, 54, said Oct. 15 after the refiner and explorer reported that asset sales to BP Plc helped boost cash to 614.9 billion rupees ($12.6 billion). Quarterly profit rose 16 percent from a year earlier.

Reliance, PetroChina Co. and Cnooc Ltd. are among Asian companies likely to spend $150 billion over the next five years on assets to secure energy supplies for the region’s growing economies, according to Sanford C. Bernstein & Co. Ambani has bought shale gas assets in the U.S. and is targeting acreages in Canada after a drop in gas output in India led to a 21 percent decline in his company’s shares in Mumbai trading this year.

“A large energy acquisition may be just what they need to kick-start things,” said Kamlesh Kotak, vice president of research at Asian Markets Securities Pvt. in Mumbai. “That will be the best possible use of their cash, which has become pretty huge now.”

Reliance fell as much as 4 percent, its biggest decline in almost a month, after its net income of 57.03 billion rupees for the three months ended Sept. 30 fell short of the 57.1 billion rupee median estimate of 22 analysts surveyed by Bloomberg. Profit was little changed from the preceding quarter.

The stock was down 3.5 percent at 837 rupees at 12:48 p.m. in Mumbai. The benchmark Sensitive Index fell 0.2 percent.

BP Alliance

Reliance holds the third-largest cash and short-term investments among energy companies in Asia Pacific, according to data compiled by Bloomberg. PetroChina and Cnooc have the most. The Indian company received $7.2 billion from the sale of a 30 percent stake in 21 oil and gas fields to BP and is working with the London-based explorer to help reverse the drop in output at India’s biggest gas deposit.

Output at the KG-D6 field may start rising by 2014, Robert Dudley, BP’s chief executive officer, said Sept. 28. Reliance and BP have sought permission from the Indian government to develop smaller fields to make up for declining output at KG-D6’s two main producing areas.

“The future depends very much on what the BP-Reliance joint venture can do to turn around their upstream business and what Reliance will do with their cash,” Neil Beveridge and Ying Lou, Hong Kong-based analysts at Bernstein, said in a report today. “We expect Reliance to use its strong cash position to fund M&A, potentially buying overseas upstream assets.”

Energy Valuations

Bernstein and Goldman Sachs Group Inc. have predicted a surge of oil and gas takeovers after global energy shares fell 21 percent in the third quarter, the worst three months since 2008. Crude in New York has declined 3.8 percent this year amid concern that Europe’s debt crisis and a U.S. economic slowdown will drag the world back into recession.

Reliance’s debt stood at 714 billion rupees as of Sept. 30. The explorer plans to have more cash than debt by March 31 as it seeks to expand into new business areas, Ambani said June 3.

Sales rose 37 percent to 785.7 billion rupees from a year earlier, and were less than the record 810.20 billion rupees in the three months ended June 30. Gains processing each barrel of crude oil into fuels followed a similar pattern, rising to $10.1 in the quarter from $7.9 in the same period a year earlier, and easing from $10.3 a barrel in April-June quarter.

Refining Margins

Refining margins may fall next year as global capacity additions, including 730,000 barrels a day in China, exceed demand growth, according to an Oct. 5 note by Bank of America Corp. analyst Sabine Schels.

Pretax profit from refining increased 40 percent to 30.8 billion rupees from a year earlier. Other income, including interest earned on cash deposits, climbed 64 percent to 1.1 billion rupees. The Reserve Bank of India has increased interest rates 12 times since March 2010 to curb inflation, helping companies earn more money on their cash.

“Reliance is making more money out of money and less out of oil,” said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi. “That shows operations are stagnating,” he said. “With BP on board, they have an opportunity to work with them on overseas projects.”

--Editors: Amit Prakash, John Chacko

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net


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