Jan. 21 (Bloomberg) -- Reliance Industries Ltd., the owner of the world’s largest oil refining complex, said it will repurchase as much as 104.4 billion rupees ($2 billion) of shares after reporting its first drop in profit in two years.
Net income declined 14 percent to 44.4 billion rupees, or 13.6 rupees a share, in the three months ended Dec. 31 from a year earlier, the Mumbai-based energy explorer and refiner said in a statement yesterday. The median estimate of 29 analysts surveyed by Bloomberg was a profit of 45.6 billion rupees.
Reliance shares slumped 35 percent last year, prompting the company to announce a buyback, and earnings from processing crude may weaken further in 2012 as increased capacity pressures margins. Europe’s deepening debt crisis and slowing growth in China and India eroded fuel demand, while output from Reliance’s biggest natural gas field fell.
“The earnings are below expectations because the refining margins have been lower,” said K.K. Mital, a fund manager at Globe Capital Market Ltd. in New Delhi. “The pressure on the company’s operations will continue in the first half of this year at least as the global economic situation remains weak.”
Reliance, controlled by billionaire Mukesh Ambani, rose 0.9 percent to 792.65 rupees in Mumbai before the earnings announcement, giving it a market value of about $52 billion. The stock has gained 1.7 percent since Jan. 18, when the company said it would consider buying back shares.
The board approved buying back 120 million shares at 870 rupees apiece for a total of 104.4 billion rupees, according to a separate statement. The price is 9.8 percent higher than yesterday’s close and the number of shares is equivalent to 3.7 percent of its equity.
Reliance in December 2004 offered to repurchase 10 percent of its equity at 570 rupees apiece, spending as much as 30 billion rupees. The company bought 2.9 million shares, paying 1.5 billion rupees, according to a stock exchange filing on April 26, 2007.
Reliance’s cash hoard surged after BP Plc, Europe’s second- largest oil company, bought stakes in 21 fields in India for $7.2 billion last year. The Indian explorer had cash and equivalents of 745.4 billion rupees as of Dec. 31, Reliance said. Debt was 745 billion rupees, making it debt-free on a net basis.
Reliance, India’s biggest company by market value, operates two adjacent plants at Jamnagar in India’s western state of Gujarat, which together make up the world’s biggest refining complex. The plants can process 1.24 million barrels a day and can turn cheaper heavy grades of crude into high-value products.
Earnings from turning a barrel of crude oil into fuels fell to $6.8 in the quarter from $9 a barrel a year earlier, according to the statement. The company earned $10.1 a barrel in the three months ended Sept. 30. Sales in the quarter climbed 42 percent to 851.4 billion rupees.
“The global nature of our businesses and weakness in economic conditions resulted in reduced earnings in the quarter,” Ambani said in the statement.
A wide price difference between heavy and light grades of crude benefits Reliance.
The average difference between light Brent crude oil and heavier Dubai oil was $2.62 a barrel in the quarter ended Dec. 31 compared with $2.95 a year earlier, according to data compiled by Bloomberg. The spread was $4.76 a barrel in the preceding quarter.
Additional capacities will shrink refining margins as fuel supplies rise. Refineries in Asia Pacific will add the most supply in 2012 as China brings 730,000 barrels a day of capacity online, mainly to produce gasoline, according to a note by Bank of America Corp. analyst Sabine Schels dated Oct. 5.
Morgan Stanley downgraded Reliance last week and cut its earnings estimates on expectations of weak refining margins.
“We believe refining margins peaked in 2011 due to shutdowns from Japan and a slowdown in additions from China,” Morgan Stanley analysts Vinay Jaising and Rakesh Sethia wrote in a Jan. 13 report. “We reckon the reverse could happen in 2012, with Japan production expected to ramp back up in the second half of this year, and China and India setting up new capacities.”
Lower refining margins may add to pressure on Reliance’s earnings from declining gas output at the KG-D6 field, located off the east coast in the Bay of Bengal.
Production dropped to about 38 million cubic meters of gas a day from about 45 million cubic meters in the three months ended Sept. 30. A peak of 60 million cubic meters a day was reached in 2010. Output has since slid because of technical issues, the company has said, without elaborating.
“Gas production is the key for Reliance and it’s a must that they raise output,” Taina Erajuuri, a Helsinki-based fund manager at FIM Asset Management Ltd. who oversees about 1 billion euros ($1.3 billion) of emerging market assets, including Reliance shares, said before the earnings. “But for that they would need some time.”
Gas output may increase after satellite fields in the KG-D6 block start by 2015, three people with direct knowledge of the matter said Jan. 3. Reliance and BP got approval to spend $1.5 billion to develop four discoveries in the area, three other people said the next day.
Reliance, which also owns chemical plants, fuel outlets and a retail-store chain, is diversifying from its core energy business in India to telecommunications, hotels and media. The company bought shale gas acreages from three companies in the U.S. in 2010 and plans to buy assets in Canada.
--Editors: John Chacko, Indranil Ghosh
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