Reliance Industries moves to restructure its balance sheet

Saudi Aramco to pick up 20% in a to-be-carved out oil-to-chemicals business for $15 billion; funds to help write down debt to zero in two years’ time

The world’s largest oil producer, Saudi Aramco, has agreed to pick up 20% stake in Reliance Industries Limited’s (RIL) oil to chemicals (O2C) business at an enterprise value of $75 billion in one of the largest foreign investments in India.

Both companies have signed a non-binding Letter of Intent (LoI) regarding a proposed investment in the O2C division, comprising the refining, petrochemicals and fuels marketing businesses of RIL.

“RIL’s Oil to Chemicals (O2C) division will be carved out of the company, in which Saudi Aramco will hold 20% stake for $15 billion on a zero-debt basis and it will operate as a joint venture. The value of the deal will change if the JV assumes debt.

“Aramco has the option to increase its stake in JV and will get a board seat, once the deal is done. Both RIL and Aramco will decide to list the JV in coming years,” said a person in the know of the development.

At the company’s 42nd AGM, Mukesh Ambani, chairman and managing director, RIL, told shareholders, “Since its inception, our Jamnagar refinery has been processing Saudi oil every single day for 20 years. Now, we have transformed our long-standing relationship of two decades into a partnership [that has] growth potential, for many more years.”

This comes at a time when RIL’s consumer facing businesses — Reliance Jio and Reliance Retail — are now contributing to over 32% of the company’s earnings before interest, tax, depreciation and amortisation (EBITDA), compared with just 2% five years ago. The contribution from the consumer facing businesses are likely to exceed 50% of RIL’s EBITDA in the coming years.

As part of the deal, Saudi Aramco will also provide 5 lakh barrels per day (bpd) of crude supply to RIL’s twin refineries in Jamnagar on a long-term basis. The deal will also include RIL’s fuel retailing business in which British oil major BP has bought 49% stake for ₹7,000 crore.

“This partnership will cover all of RIL’s refining and petrochemicals assets, including 51% of the petroleum retail JV,” Mr. Ambani said.

The investment by Saudi Aramco is subject to due diligence, definitive agreements, regulatory and other customary approvals. The move will help the Indian firm, which has the highest debt outstanding in the country, to deleverage considerably. RIL’s outstanding debt as on June 30 stood at ₹288,243 crore compared to cash and cash equivalents of ₹131,710 crore.

‘May improve sentiment’

“Market is going to heartily welcome the seminal announcement by India’s largest company. This is India’s largest-ever FDI inflow and would help dissipate the gloomy sentiment currently pervading in the economy and stock markets,” said Ajay Bodke CEO, PMS, Prabhudas Lilladher.

RIL’s O2C business posted revenue of ₹5.7 lakh crore, recorded exports of ₹2.2 lakh crore and saw EBITDA of ₹52,041 crore in the last fiscal. The company processed 68.3 million tonnes of crude that year with gross refining margins of $9.2 per barrel.

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