ANALYSIS. Has the RIL gusher been capped?

For analysts and investors tracking Reliance Industries Ltd (RIL), the question is how far its telecom venture RJio will pay off.

Jio needs to do well not only for its own sake, but also to compensate for the falling revenues from RIL’s other high stakes business — exploration and production (E&P) of oil and gas.

While its refining prowess helps the company report record-breaking profits quarter after quarter, the contribution from its E&P business is on a continuous decline.

In the just-concluded December 2015 quarter, E&P contributed less than 3 per cent to the conglomerate’s revenue of ₹73,341 crore while it contribution to the operating profit stood at less than 1 per cent. RIL’s year-on-year quarterly operating profit from E&P has fallen nearly 90 per cent to ₹90 crore in the third quarter of FY16. Organised retail, in fact, at ₹147 crore, has overtaken E&P by profit.

The upstream business has been primarily hit by two issues. Global crude oil benchmarks have gone into freefall for over a year, and are still trying to find a viable bottom. On the other hand, the company is fighting off falling volumes and prolonged litigation.

The Panna-Mukta oilfields, off the Gujarat coast and RIL’s first upstream investment, have seen volumes fall 12 per cent year-on-year. The Tapti gas field will be wound down by March, RIL said in its latest investor presentation, on account of natural decline.

Tapti produced 0.76 billion cubic feet of gas and (bcf) and 0.04 million barrels of oil and condensate, compared to 3 bcf and 0.05 million barrels in the year-ago period.

At its flagship KG-D6 fields as well, RIL blamed falling production on the natural decline of the fields, producing 34.47 bcf of gas and 0.42 million barrels of oil and condensate in the December quarter, while also having trimmed the number of fields from the original 23 blocks to now just four. Both fields are also the subject of arbitration over pricing. Globally, in its US-based shale business, RIL has been hit hard, as benchmarks Henry Hub and WTI touched multi-year lows in December.

Operating profit from the segment fell nearly 90 per cent year-on-year to ₹61 crore. At a recent press briefing, V Srikanth, Joint CFO, said the company will cut capital expenditure in shale from $1.2 billion in 2014 to $500 million in 2016.

The only bright spot in this picture is the three coal bed methane (CBM) fields in Madhya Pradesh, from which gas is expected to flow by end-March. RIL plans to produce 3.5 million standard cubic metres a day of gas from the two Sohagpur blocks in the State.

An analyst, who did not wish to be named, said: “RIL has been lying low on upstream in the last two years or so. It will maintain the status quo on production unless the government allows a price hike in natural gas, especially for CBM. They are not going to be aggressive on capex in E&P either, till then.”

In which case, he says, the next big push for RIL’s stock will depend on how well RJio performs while E&P becomes even less significant over the next few years.

Heavy investment RIL has invested heavily in setting up a pan-India network for RJio, expected to be launched commercially in April. Going by the initial roadmap the company is targeting 100 million subscribers in the first year. Here too, RIL faces stiff competition from incumbent operators.

Airtel, Vodafone and Idea Cellular have ramped up their investment into network and customer care in a bid to be ready for RJio's entry.