Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. Reads
  2. Lite

All About RIL's Deal With Saudi Aramco

Editor, TRANSFIN.
May 7, 2021 11:56 AM 5 min read
Editorial

Saudi Aramco’s reliance on India may have become a little more costly (and crucial) than the company would care to admit. 

A Done Deal that Wasn’t

Two years ago, the oil major began negotiations with Reliance Industries to purchase a 20% stake in the latter’s oil-to-chemicals (O2C) business.

At an enterprise value of $75bn, it would have been one of the largest foreign investments in an Indian company ever, and would have given Aramco a foothold in one of the largest oil markets in the world.

The deal was to be concluded by March 2020 - only to be delayed by the COVID-19 pandemic and relegated to uncertainty.

FYI: Aramco’s tryst with India is not limited to RIL. It is also exploring a $44bn refining + petrochemical complex off the coast of Maharashtra in Raigad alongwith Indian Oil, BPCL and HPCL.

 

Rumour Has It

In recent weeks, negotiations have resumed. Both sides have held talks, and Aramco is reportedly mulling paying with its shares at first and then via staggered cash payments over several years.

Meanwhile, RIL has announced that it intends to spin-off its O2C vertical into a wholly-owned subsidiary (more on that here), a decision possibly set in motion in anticipation of the Aramco talks.

Moreover, a slice of Aramco may be up for grabs - and rumour has it that Mr. Ambani may be the buyer. On Tuesday, Saudi Crown Prince Prince Mohammed Bin Salman said, rather cryptically, that “there are discussions happening right now about a 1% acquisition [of Aramco] by one of the leading energy companies in the world”.

However, to be sure, this may just be one of those all-smoke-no-fire situations. Aramco has also been in talks with Chinese investors for a stake sale, so this mysterious energy company may just be a Chinese oil firm or a sovereign wealth fund like the China Investment Corporation.

Either way, the deal for a stake in Reliance O2C remains on the table, and both parties are eager to see it through.

However, the dynamics have changed considerably over the last two years.

 

How the Turntables...

Since 2019, the biggest thorn on the side of the talks was RIL O2C’s valuation. Reliance demanded a higher number, but Aramco was unwilling to foot the bill for such a price-tag.

Initially, at least, the Saudi oil giant seemed to have the upper hand. Mr. Ambani's conglomerate was drowning in debt - net debt had tripled in five years to ₹2.05Lcr ($27.67bn) (as of March 2019) - and its heavy investments in the hypercompetitive telecom segment meant that significant cash burn would persist in the near-term.

On the other hand, Aramco's coffers were overflowing with liquid gold. A highly-anticipated IPO made it $25.6bn richer. And it was aggressively expanding its global presence, including via crude oil storage facilities in Japan and a $10bn refining complex in China.

Fast-forward two years, though, and the tables have turned dramatically.

 

RIL Rising

RIL's stake-selling spree throughout 2020 saw it raise ₹152,056cr ($20bn) from the likes of Facebook, Google, Silver Lake, General Atlantic, KKR and Qualcomm, among others. A rights issue saw it bring in ₹53,125cr ($7bn). Strong growth in its telecom and retail verticals and a ballooning market capitalisation helped it rake in more rupees such that by June 2020 the company declared that it had become net debt-free.

Then there was RIL’s decision to hive off its O2C segment, which it expects to wind up by Q2FY22. This could do for RIL what Reliance Retail Ventures and Jio Platforms have been doing: attract abundant capital, shore up valuation and position attractively for a possible listing.

In the long run, oil, while precious and profitable, is also a tainted commodity. The future of energy is green and renewable - and RIL understands this. Just as the clout of its telecom and retail arms has risen in recent years - even as share of O2C’s contribution has steadily dropped - the company is increasingly investing in New Energy and New Materials and aims to become "net carbon zero" by 2035. In fact, Morgan Stanley predicts that RIL will invest $13-15bn in new energy in the next decade - more than the amount it is expected to invest in its digital, retail and chemicals arms. 

 

Aramco in a Fix

On the other hand, Aramco has seen better days.

The past year has been brutal on the company. Annual profit dropped 44% as a COVID-induced dip in oil prices drastically hurt its margins. Brent crude fell below $20 per barrel last year. WTI even went negative. With global demand remaining uncertain - especially in light of the devastating Second Wave in India - prospects of a strong and imminent recovery seem dim. Perhaps prophetically, as economies definitely move away from conventional energy sources, Aramco recently lost the title of “world’s most profitable company” (to Apple).

A $69bn purchase of state-owned chemicals business Saudi Basic Industries Corporation (SABIC) and a hefty $75bn annual dividend further strained the company's balance sheet. There are now reports that the company may cut future dividend payments.

Meanwhile, talks regarding refinery deals in China and Maharashtra have stalled. And, while unrelated, India’s patience with the Saudi oil industry has worn thin of late, thanks to the latter’s insistence on extending production cuts to prop up oil prices (more on that here). In the (admittedly unlikely) event of diplomatic hostility between New Delhi and the petrostate, regulatory roadblocks may stifle RIL’s romance with Aramco.

 

All Said and Done...

Problems it has many, but that’s not to say Aramco is now less inclined to buy a stake in RIL O2C. The oil major has been on a mission to increase its global footprint for some time now, buying stakes and entering into joint ventures in large companies in countries like South Korea, Malaysia and China.

India, with its large domestic market, is an obvious catch. Moreover, the incoming EV revolution that may hamper Aramco’s long-term prospects and the resultant fall in demand in crude are expected to play out relatively slowly in India. Much to Aramco’s benefit.

So, while the dynamics may have changed and RIL may be in a stronger position to negotiate terms than it was in 2019, both sides stand to gain from their partnership.

RIL may garner possibly more than $15bn - money it may not need as desperately as it did two years ago, but still money that can help the conglomerate. Remember that Jio Platforms is aggressively confronting a resurgent Airtel and Reliance Retail is trying to compete against the Tata Group in the online grocery market, both of which can be capital-intensive exercises.

Saudi Aramco, meanwhile, would gain a ready-made market for 5 lakh barrels per day of its crude, a foothold in India, and a potentially bigger downstream role in the future. Significantly, this is in tune with the company’s eagerness to diversify its assets and reduce its dependence on the Kingdom’s resources.

As the then-Chairman of the oil company, Khalid al-Falih, said in 2019:

Going forward, the world is going to be Saudi Aramco’s playground.

FIN.
 

The cut-throat world of Business and Finance means that there is fresh News everyday. But don't worry, we got you. Subscribe to TRANSFIN. E-O-D and get commentaries like the one above straight to your inbox.