Reliance

Reliance Industries has said it will consider a share buyback in its Friday board meeting, and the stock went up 5% to 780. The theory is that Reliance will use its huge cash reserves – over 85,000 crore – to buy back about 10,000 to 12,000 cr. worth of stock. They will do this using a “market buyback”, where an investment banker will buy Reliance shares using Reliance’s money.

(For more information on what market buybacks are, read my article: Buying Back Our Deficit)

Moneylife finds that they have done a buyback announcement earlier, that didn’t quite meet their stated goals:

RIL has announced a buyback. It had announced a buyback on 28 December 2004. On that occasion the maximum buyback price announced was at Rs285 per share (that is, pre-bonus price of Rs570 per share). The maximum buyback price RIL announced was about 10.87% premium over the share price just before the buyback announcement.

The buyback program, seven years ago, was kept at Rs2,999 crore, which was about 10% of the share capital and free reserves of Reliance as on 31 March 2004.

However, throughout the period, Reliance bought back its shares only on nine days. And, the total buyback done by the company was a measly Rs149.62 crore. So, the actual buyback program was just 5% of the total buyback size of Rs2,999 crore.

(Emphasis mine)

This is not just Reliance, but in most market buyback announcements I have tracked in the last five years, companies have bought substantially lower quantities than they supposedly intended to. The idea of a share buyback was usually to keep the stock price up, but a few days after the announcement the shares would go back down. (Also see: Rajat Rajgarhia of Motilal Oswal thinks the aim is to “shore up sentiment in the stock”)

Another reason I’ve seen quoted for this announcement is that Reliance lost its position as the top weighted stock on the Index, and that Mukesh bhai is big on ranks. Not that this is substantiated, but it’s such an awesome gossip conspiracy story that I had to mention it!

It’s not usual, though, that a company of Reliance’s size – one of the largest in India – makes such “preliminary” announcements, but the company has been very careful to ensure that the stock doesn’t crater around bad results seasons. They have announced gas finds, deals, and agreements, nicely timed around results announcements, which is all above board (and it’s not just them, the big IT company we all know about has done it as well).

The stock, in the last couple years, has not done very well:

And in relative terms, the high for this stock is 1,650 in 2008; and it recently saw levels of 685.

Will this announcement take Reliance to the next level? Chances are: no. They have to show great results. Their Q2 numbers were not great, and their gas and crude finds are in decline; for serious growth they have to rapidly increase investment. While a buyback at this level for the company is good (lesser capital to service), there will be large capital requirements coming in as they explore and find gas, invest in shale assets, expand the broadband/BWA offering, enhance their retail setup or indeed, make their massive refining operation more efficient. These are real game changers, not the buyback.

If the quick rise from the bottom – nearly 20% now – is exciting, then the game is in short term trading, not in a “buy and hope for the Ambani magic”.

A fallout of the Libyan Crisis is that Saudi Arabia is taking up the slack. Except, it can't easily replace Libyan Crude.

“Libya is a producer of light, sweet crude,” says Andy Lipow, president of Lipow Oil Associates, a Houston consultant. “The spare capacity among Opec members is heavy, high-sulphur crude.”

Heavy, sour = higher density, higher sulphur content than "light, sweet". I doubt people are weighing or tasting the darn thing.

The spiel is that refinining heavy-sour is much more difficult, and there are a lot of refineries doing only light-sweet (in industry parlance, aren't "complex" enough). The article goes on to say that these refineries are in trouble, they have to find other light, sweet sources, blah blah.

But.

There are enough complex refineries processing heavy-sour, like Stuart Staniford says:

But it's an entirely different matter to claim that the entire global refining industry cannot make more use of Saudi crude right now, which is what these news stories are implying.  After all, if there's any refinery anywhere that could take more Saudi crude and refine it into gasoline, diesel, or some other useful product, then that refinery could substitute for the lost output from refiners of Libyan crude that cannot switch.  So there's no requirement for individual refineries to switch as long as someone, somewhere, anyone, anywhere can refine more Saudi crude at present.  If that were to be true, then global production of refined products need not fall, as long as at least 1.3mbd of additional Saudi oil can be refined to replace the 1.3mbd of Libyan crude exports that are soon not going to be showing up at oil terminals in Europe.

Among the biggest of the heavy-sour capable refiners is the Reliance Industries RPL plant in Jamnagar. If heavy-sour refining is going to be in demand, and the light-heavy crude price differences sustain, we should see RIL making a good run in the months ahead.

Also, the BP deal is a huge positive. $7.2 billion is usually good enough for a lot - and they already have another $7 billion (31,000 cr.) in the bank. This is a war chest, and they'll buy something with it, surely.

Disclosure: Long.