Reliance to buy Chevron stake

Reliance Industries owner of the world’s largest refining complex, will buy Chevron Corp.’s 5 percent stake in Reliance Petroleum as part of the Indian company’s plan to acquire the remaining shares of its unit.

The board will consider acquiring the 30 percent of Reliance Petroleum not already owned by the parent company on March 2, Mumbai-based Reliance Industries said in a statement to the Bombay Stock Exchange .

Reliance Petroleum started a 580,000-barrel-a-day refinery in December at a time of excess industry capacity and declining earnings from processing oil because of a slump in global demand for gasoline and diesel.

“Reliance Industries’ margins are already under pressure and Reliance Petroleum will add to this,” said Vinay Nair, an analyst at Khandwala Securities, who has a “buy” rating on the parent company’s stock. “Reliance Industries shareholders are likely to be disappointed.”

The plan to acquire the remaining shares comes as Reliance Petroleum has dropped 54 percent in the past year. Reliance Industries issued the statement on purchasing the Chevron stake late last night. Chevron confirmed the plan to sell its five percent stake for an undisclosed amount, the San Ramon, California-based company said.

Chevron’s 2006 investment in Mumbai-based Reliance bucked the trend among companies such as Royal Dutch Shell Plc and BP Plc, who were scaling back or quitting Indian energy projects because of government price controls that reduced profits from fuel sales.

“We cite attractive investment alternatives, and continuing low global demand for refined products, as principal reasons for selling our interest in the Reliance refinery,” Lloyd Avram, a Chevron spokesman said in a statement e-mailed from San Ramon.

Reliance Industries has the option to buy Chevron’s stake at 60 rupees a share if the US company doesn’t increase it, according to Reliance Petroleum’s share-sale document. That price would be a 21 percent discount to Reliance Petroleum’s current level and would give Chevron $265 million for the stake, equivalent to about 14 hours of sales.

Chevron acquired 5 percent of Reliance Petroleum at 60 rupees a share in April 2006 and had the option to increase its holdings in the project to 29 percent.

The company had until July 27, or three months after the plant was fully commissioned, to decide whether to raise its stake, Chevron said in a filing with the U.S. Securities and Exchange Commission February 26.

The authors are a Bloomberg News columnists. The opinions expressed are their own