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Saudi Aramco to buy stake in Reliance: A win-win deal for both


  • Reliance Industries announces 20% stake sale in its OTC business
  • Deal will help to pare RIL’s debt burden
  • A win-win deal for perfect synergy

 

Reliance Industries (RIL) has announced India’s largest foreign direct investment and a game changer deal with Saudi Aramco at its AGM in August 2019. The world’s largest oil producer, Aramco, will acquire a 20% stake in Indian behemoth’s oil-to-chemicals (OTC) business at an enterprise value of USD 75 billion. In exchange, RIL will source 500,000 bpd of oil representing ~36% of its total requirements from Saudi Aramco.

RIL’s Oil-to-chemicals division (formed by combining refining and petrochemicals businesses which coverts petroleum into chemicals) has achieved Rs 5.66 lakh crore revenue in FY 2018-19. The deal will cover all of Reliance’s refining and petrochemicals assets, including 51% of its petroleum retail joint venture.

A win-win deal

This could be a win-win deal for both RIL and Aramco. While, this would allow for RIL to deleverage its debt laden Balance Sheet and focus on more profitable segments, Aramco could be looking forward to grabbing a stronghold in India ahead of its IPO.  

Under the terms of the non-binding deal, RIL will get ~USD 15 billion which it will use to pare its debt burden. According to Jefferies India, RIL had a net liability of USD 36.9 billion at the end of June with its refining and petrochemicals business accounting for about USD 5.6 billion of it. RIL’s stake sale can help it retire ~40% of its net liability or nearly all its non-telecom debt.

In the same AGM, RIL also expressed its intention of becoming a debt-free company by 2021. This probably was a reply to a recent Credit Suisse report which had raised some concerns about RIL’s overall debt level. The report states that RIL’s financing liabilities has mounted to USD 65 billion in FY 2018-19 from USD 19 billion in FY 2014-15 and as a result, its interest cost (both reported and capitalised interest cost) has risen to USD 4 billion in FY 2018-19 from USD 1.2 billion in FY 2014-15. Much of this increase in debt was for financing expansion of both businesses- the core refining and petrochemicals business and its consumer facing business which include Jio and retail. As seen in conjunction with other recent deals, including the one with BP in fuel retailing, or the deal with Brookfield for tower business as well as the deal talk to sell its fibre division, this latest deal with Saudi Aramco will possibly lay a roadmap for RIL to reduce its debt level. Furthermore, it will also enable to continue expansion drive, especially in RIL’s fastest growing business – telecom, which is the highest EBITDA margin segment for the company with 5G auction being on the anvil as well. This stake sale will further bolster RIL’s move towards focusing and increasing share of its aggressive new-age consumer business in overall profit and balance sheet, which it has been steadily doing over the past few years to achieve an equal share with its hydrocarbon business (which includes refining and petrochemicals) under its hedge business model plan.

Moreover, this deal will further support RIL’s crude sourcing capabilities. RIL’s formidable sourcing has traditionally given it an edge over competitors and contributed to its GRM (Gross refining Margin). The company historically has bought oil from Iran and Venezuela- now under US sanctions. This deal with Saudi Aramco will help RIL to secure its sourcing and supplies. Under the terms of deal, RIL will receive supply of ~36% of its requirement from Saudi Aramco, who will now also be an investor in the business apart from a key supplier, could bring pricing advantages too to RIL.

On the other side, Saudi Aramco, which is one of the world’s largest oil companies by revenue and one of the most profitable companies in the world, has been aggressively increasing its footprint in downstream businesses globally and diversifying beyond the upstream oil production business. India is amongst the world’s fastest growing fuel market and the third largest consumer of crude oil.  For this Saudi state-owned oil company, buying a stake in RIL will give it a much sought after beachhead in India to get a captive and steady consumer for its crude oil amidst global uncertainty in the oil and gas sector. The US, which is the world’s largest consumer of energy, is depending less on Saudi Arabia for its oil demand. Aramco needs a new market to hedge besides US and China and India fits in well with these criteria. According to IBEF, India currently has a refining capacity of 249.4 MMT which exceeds the demand of 211.6 MMT, making it the second largest refiner in Asia. Apart from this, Saudi Aramco is also keen on retailing fuel in India. A refinery in India would allow it to export fuel to other oil deficit nations in Europe and the US.

As Mukesh Ambani, the chairman of RIL, said, “Our transactions with Saudi Aramco will create win-win relationships, generating significant strategic value for our partners.” This deal truly signifies “perfect synergy between the world’s largest oil producer and the world’s largest integrated refinery and petrochemicals complex”.

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