Deal to help RIL meet its target to turn zero-debt firm, Aramco gets a foothold in refining space in India
In one of the largest FDI deals in India, Reliance Industries Ltd (RIL) will sell 20% stake in its refining and petrochemicals business to Saudi Arabian Oil Co (Saudi Aramco) for $15 billion, or Rs 1.05 lakh crore.
The deal values Mukesh Ambani-promoted RIL's oil business at $75 billion.
Following the deal, RIL, which has debt of about Rs 2.8 lakh crore plans to become a zero-debt company in the next 18 months.
"Saudi Aramco and Reliance have agreed to form a long term partnership in our oils-to-chemicals division. This signifies the perfect synergy between the world's largest oil producer and world's biggest integrated refinery and petrochemicals complex," Ambani told the company's 42nd annual general meeting.
As part of the deal, Aramco will supply 500,000 barrels of crude per day to RIl.
According to Gagan Dixit, vice-president - oil and gas analyst, Elara Capital, the combined value of refining plus petchem by Aramco at $75 billion is positive. "It would provide much-needed capital for oil-to-chemicals expansion plans in a phased manner over the next decade as mentioned by RIL in FY19 annual report, for which we estimate 12 million metric tonne rise in petchem capacity should require another around $11 billion in the long term.
"But in the near term, it's a positive development that Rs 1.05 lakh crore available from Aramco and Rs 80-90,000 crore per annum, operating cash flow would help de-leverage RIL within two years. We believe a key trigger for the conclusion of RIL, Aramco deal would be declining probability of Maharashtra refinery of OMCs where Aramco committed earlier as its cost jumped Rs 3 lakh crore to Rs 4 lakh crore due to delays and environmental-related commitment requirement."
This move is the latest in a spree of Aramco refinery investments as the company plans to double its processing network to handle as much as 10 million barrels a day by 2030, locking in friendly buyers for the kingdom's crude.
Reliance also said it will receive Rs 7,000 crore from BP Plc in a deal announced last week that gives the European oil major a 49% stake in the RIL's fuel retail business.
Mahesh Singhi, founder and managing director, Singhi Advisors, said the sale of key energy assets is expected to help the oil-to-telecom conglomerate to offset the headwinds it has been facing in its core petrochemical business vertical owing to soft refining margins.
"India's largest private sector player has an outstanding debt of Rs 2,87,505 crore and the raised capital is expected to de-leverage the company to a significant extent and realise the objective of making the company a zero-debt entity within 18 months," said Singhi.
RIL is looking to embark on a hyper-ambitious expansion programme and mark its foray into key business domains.
"The capital raised from the stake sale is likely to be used by the company to consolidate its hold over the booming telecom sector through measures like the commercial rollout of its broadband service Jio Fiber," Singhi said.
RIL has been selling assets from mobile-phone towers to oil and gas fields to reduce the leverage that's risen over the past few years as it poured money into new sectors such as telecommunications.
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