Fitch Ratings Monday revised upwards its outlook on Reliance Industries Ltd.'s (RIL) long-term local currency rating at 'BBB stable' from 'positive' based on better than expected showing by its US shale gas business which "counterbalanced" the dip in its domestic gas business.

 

 

 "The change of outlook on the local currency issuer default ratings, which is not constrained by the BBB-sovereign to stable reflects our revised expectations on RIL's medium-term credit metrics and the revenue contribution of the upstream oil and gas business," it added.

 

 RIL continues to consistently out-perform the regional refining margin benchmarks, the report said. Fitch expects the company's profitability from refining and mid-stream operations to improve further once ongoing investments for capacity addition are completed over the next two to three years.

 

 "Fitch Ratings has affirmed Reliance Industries' long-term foreign currency issuer default rating (IDR) at ‘BBB-’ with a stable outlook," the note added.

 

 It said RIL would not benefit from the new gas price of $5.6 per mmbtu (million metric British thermal units) for its D1 and D3 offshore fields in the Krishna-Godavari Basin, which accounted for 60 percent of its KG-D6 gas production for the first half of the current fiscal. RIL is not allowed to charge the new price till its arbitration case with the government over the alleged shortfall is not resolved.

 

 "Under these circumstances, it is unlikely that RIL will expand its domestic gas production, as earlier expected by Fitch," it said.

 

 The report noted that the company faces challenges on domestic exploration business in the form of geological risks, with gas production from the KG-D6 basin falling to 12.8 million metric standard cubic metres daily in the first half of the current fiscal from 13.8 mmscmd in the previous fiscal and 26 mmscmd in 2012-13

 

 This shortfall is counterbalanced by a 38 percent volume growth in the US shale gas business, which contribution to the earnings of the exploration and production business has increased to Rs.1,050 crore out of the segmental earnings of  Rs.1,860 crore in first half of 2014-15, Fitch said.

 

 The ratings agency expects RIL to continue generating strong operating cash flows of $6-8 billion per year.

 

 As the company is investing around $11 billion over the next two years in its telecom business, the high capex needs will lead to negative free cash flows for the next two years and an increase in net leverage, Fitch said.

 

 “Net leverage, though, is likely to remain well under three times, which is comfortable for the company’s ratings. The previous positive outlook on RIL’s long-term local currency IDR was also based on the expectation that it would maintain financial leverage at below 1.5 times,” the report added.