Saudi Aramco plans to buy 20% stake in Reliance’s refining unit

Saudi Aramco is planning a multibillion dollar investment in India’s Reliance Industries as the energy giant diversifies its oil business. In preparation for what could be the world›s largest initial public offering (IPO), state-run Aramco began publishing its results this year and also started issuing international bonds. The world’s top oil producer plans to launch an IPO by 2020-2021, having postponed its flotation from last year.

Coinciding with the release of first half results, Aramco signed a letter of intent to take a 20% stake in Reliance’s oil-to-chemicals business in one of the largest ever foreign investments in India, Reliance said on Monday.

Aramco’s Senior Vice President of Finance, Khalid Al Dabbagh, confirmed the letter of intent had been signed but added that talks with Reliance were at “very, very early stages.

He also said that Aramco is ready for its IPO, but the timing will be decided by its sole shareholder, the Saudi government.

While terms of the deal are yet to be finalised, Reliance will get roughly $15 billion, including some debt adjustments for the 20 per cent stake, PMS Prasad, Executive Director of Reliance Industries said, adding the two companies aim to close the deal by March 2020.

Aramco is expanding its downstream, or refining, chemicals and marketing, footprint globally by signing new deals and boosting the capacity of its plants to secure new markets for its crude and reduce its risk to any downturn in oil demand.

For years, Aramco has been a regular crude supplier to Indian refiners via long-term crude contracts.

And while it owned stakes in refineries or storage assets in other key Asia markets such as China, Japan and South Korea as well as in the United States where it owns Motiva, the largest national refinery, it has not secured that same access in India, a fast-growing market for fuel and petrochemicals.

The deal will see Reliance buy up to 500,000 barrels a day of crude oil from Aramco, which would more than double the volumes that Reliance buys now, Reliance›s Prasad said.

“This signifies perfect synergy between the world›s largest oil producer and the world›s largest integrated refinery and petrochemicals complex,” said Reliance Chairman Mukesh Ambani, while announcing the deal in Mumbai on Monday.

Ambani said the deal would be the biggest foreign investment in the history of Reliance and also one of the largest foreign investments ever in India.

Saudi Aramco on Monday announced for the first time its half-year financial results. The company’s net income was $46.9 billion for the first half 2019, compared to $53.0 billion for the same period last year. Earnings before interest and tax was $92.5 billion, compared with $101.3 billion a year earlier. Free cash flow was $38.0 billion, compared to $35.6 billion for the same period last year. Capital expenditure was $14.5 billion, compared to $16.5 billion for the same period in 2018.

Commenting on the results, Saudi Aramco President & CEO Amin H. Nasser, said: “Despite lower oil prices during the first half of 2019, we continued to deliver solid earnings and strong free cash flow underpinned by our consistent operational performance, cost management and fiscal discipline.

Disclosing our financial results for the first time, as part of our $12 billion debut international bond issuance, marked a significant milestone in Saudi Aramco’s history.

“We demonstrated our reliability with near 100 per cent delivery on our customers’ requirements for oil and refined products, maintaining our total hydrocarbon production of 13.2 million barrels of oil equivalent per day and an average daily crude production of 10 million barrels per day,” he added.

“Leveraging our strength in Upstream, we continued to deliver on our Downstream growth strategy, including acquisitions in both Saudi Arabia and key international markets. These acquisitions are expected to enhance dedicated crude placement, increase refining and chemicals capacity, capture value from integration and diversify our operations.”

“Looking ahead, we will maintain a prudent and flexible balance sheet. Our financials are strong and we will continue to invest for future growth,” Nasser concluded.

The Reliance deal with Aramco will cover all of Reliance›s refining and petrochemical assets, along with its majority stake in its petroleum retail joint venture.

Aramco›s planned IPO is the centrepiece of Saudi Arabia›s economic transformation drive to attract foreign investment and diversify away from oil.

Work on the IPO was halted in 2018 when Aramco shifted its attention to the acquisition of a 70 per cent stake in petrochemicals maker Saudi Basic Industries Corp. Aramco also paid a dividend of $46.4 billion to the government including a special dividend of $20 billion, up from $32 billion a year earlier.

Agencies