In recent times, the market has shrugged off the negative news on Reliance Industries’ KG-D6 block. Output from the block has been dipping and the Government has been stalling a gas price hike. Yet, the Reliance stock has held its ground.
What makes the market indifferent to Reliance’s KG-D6 woes? Perhaps because it no longer accounts for a significant proportion of the company’s revenues or profits.
In June 2010, when gas output from the KG-D6 block was at its peak of 60 mmscmd, the oil and gas segment (which captures KG-D6 results) chipped in a third of Reliance’s operating profit. But since then the segment’s contribution has gone down steadily.
In the September quarter, it accounted for a mere 6 per cent of the company’s operating profit, with the block producing just 14 mmscmd of gas. Its contribution to Reliance’s revenues was barely 1 per cent.
Today, it is the refining segment (which converts crude oil into petro-products) that chips in with more than half the company’s operating profit, up from just a third in June 2010. Downstream petrochemical products account for another 41 per cent of the profit.
Reliance’s entry into shale gas fields in the US is also paying off. Output from the company’s three joint ventures in that country increased nearly 50 per cent in the first half of this year.
Reliance has also planned big investments to increase capacity and efficiency in the cyclical petrochemicals and refining businesses. A cash hoard of Rs 90,540 crore means funds are not a problem.
Besides, with the company’s retail business achieving cash break-even in FY13, there is hope that this business will soon make a larger contribution to profits. With a significant export component, the company is also a direct beneficiary of the weak rupee, which has aided market sentiment.
While there are problems with the existing gas fields at the KG-D6 block, the market seems to be betting on new fields producing more; also, these fields are not subject to policy uncertainties.
Reliance, along with its partner BP, has major investment plans to increase output from new fields, including satellites, in the block.