Saudi Aramco to acquire 20% stake in RIL's oil-to-chemical business

Partnerships with Aramco, BP will bring in Rs 1.1 trillion; funds to be used to pare debt

Saudi Aramco and Reliance Industries (RIL) have signed a letter of intent for a proposed investment in RIL’s oil-to-chemical division, the company announced at its annual general meeting (AGM) on Monday. The deal is likely to fetch $15 billion (~1.06 trillion) for a 20 per cent stake.

RIL is also looking to turn debt free in the next 18 months. As part of the debt-reduction plan, RIL looks to find global partners for its retail and telecom businesses. The company also plans to unlock value in real estate and financial investments.

“Saudi Aramco and Reliance have agreed to form a long-term partnership in our oil-to-chemicals (O2C) division. In terms of the understanding between the parties, Saudi Aramco will invest in Reliance for a 20 per cent stake at an enterprise value of $75 billion for the O2C division,” Mukesh Ambani (pictured), chairman and managing director (CMD), RIL, informed shareholders.

The oil-to-chemical business will be a separate division, which will also hold 51 per cent stake in the petro-retail business.

Aramco will pick 20 per cent stake in the division.

Aramco will also be given a board seat at the RIL parent level. “The division will be carved out into a subsidiary in five years,” said a RIL spokesperson.  

Earlier this month, RIL entered into a joint venture with BP to sell a 49 per cent stake in its petroleum retailing business for Rs 7,000 crore.

“This (Saudi Aramco) partnership will cover all of RIL’s refining and petrochemicals assets, including 51 per cent of the petroleum retail JV,” Ambani added at the AGM. As part of the deal, Saudi Aramco is also expected to supply 500,000 barrels per day of crude oil on a long-term basis to RIL’s Jamnagar refinery. The two companies are yet to sign a definitive agreement for the deal. Ambani has chalked out a road map to make the company debt free by March 2021. “We ended last year with net debt of Rs 1.54 trillion. We have a very clear road map to becoming a zero net debt company within the next 18 months that is by 31 March 2021,” he said.

RIL’s consolidated debt as of June 2019 was at Rs 2.88 trillion. Credit Suisse had earlier this month cut its target price and downgraded RIL from neutral to underperform, on the back of higher liabilities and slow enterprise roll out for the telecom business.  Analysts have a more conservative timeline for debt-reduction. 
 

“In the near term, it’s a positive development that Rs 1.05 trillion available with Aramco and Rs 80,000-90,000 crore per annum operating cash flow would help de-leverage RIL within two years,” analysts with Elara Capital wrote in a note on Monday.

The analysts expect the Aramco investment to help provide the required capital for an estimated 12 million tonne rise in petchem capacity, which will require $11 billion in the long term. For the consumer business, the company looks for a partial divestment in the near future and a long-term plan for public listing. “We have received strong interest from strategic and financial investors in our consumer businesses, Jio and Reliance Retail. We will induct leading global partners in these businesses in the next few quarters,” Ambani informed shareholders.

He added, “We will move towards listing of both these companies (Jio and Reliance Retail) within the next five years. We will also evaluate value unlocking options for our real estate and financial investments.”

Ambani expects both deals with BP and Aramco to be completed in the current financial year and sees commitment worth Rs 1.1 trillion combined from the two deals. The group chairman also commented on Jammu and Kashmir, stating “We stand committed to support the people of Jammu and Kashmir and Ladakh in all their developmental needs.”