The unabated rise in the prices of crude petroleum has pushed the stocks of oil producers in the limelight. Reliance Industries (RIL) and Cairn India are two stocks that are likely to outperform the benchmark indices in the coming months. RIL has pursued the strategy of backward integration since its inception in the 1970s as a textile firm. It has become a dominant force in polyester, fibre intermediates, plastics, petrochemicals and refining businesses. In the refining space, it has an integrated capacity of 60 million tonnes, leaving no space for any foreign refining company to enter India. The refinery has been designed to process diverse kinds of crude and has a high level of flexibility, resulting in elevated gross refining margins. This gives the company an edge over its competitors.
Regarding the deep sea exploration, RIL has outperformed ONGC. With no experience in drilling, it has tied up with Canadian partner NIKO Resources and is now expected to create history in terms of value creation. The production of gas from the KG D-6 block, estimated at 80 million metric cubic metres per day, is expected to be enhanced to 150 million metric cubic metres per day. Multiply this by $4.2 per MM BTU (British thermal unit standard for the calorific value of gas) and it will bring fantastic cash flows for the company.
Reliance Gas Transportation was incorporated to transfer gas from the east coast to the west coast, covering a distance of approximately 1,400 km. The transport cost will be $1.10 per MM BTU at the most. If the company has to transport 150 million metric cubic metres (estimated output) at the rate of $1.10, it will bring in huge cash to the company's coffers. Also, RIL is conducting exploration in 35 blocks. Even if it has a success rate of 10 per cent, that is three blocks like the D-6, one can imagine the incremental value this will create for the shareholders.These triggers can help the RIL stock cross the Rs 3,000 levels by 2012. The company issued a 1:1 bonus in October 2009, when the stock was around Rs 2,200, and the share price halved after the bonus. But with the demand for its products intact, it is only a matter of time before it bounces back. Investors will benefit immensely from staying invested in the stock.
Cairn India is a small company which took over the business of Shell and has successfully discovered oil and gas blocks in the Barmor, Rava, Aishwarya and Gauri fields. The long pending pipeline issue has been resolved. Cairn recently raised the estimates of its reserves in its Rajasthan block from 3.7 billion barrels of oil equivalent (boe) to 4 billion boe and also raised its estimates on potential reserves from 4 billion boe to 6.5 billion boe. Investors can consider buying Cairn at current levels of Rs 308. By 2012, it could reach Rs 650-750.
The author is a Mumbai-based analyst.
