But the Macquarie report lays out several reasons for RIL looking at a new set of companies. For instance, Valero has shut it 235-thousand barrel per day (kbpd) Aruba refinery, while Sunoco has announced plans to shut its 145-kbpd Eagle Point refinery. Sunoco and Tesoro would be attractive takeover candidates given their large retail and infrastructure networks.
As far as Delek is concerned, its lack of refining capacity would fit well with RILs strategy to market its own refining products from India. This is despite Delek having a relatively modest retail network and marketing infrastructure. Moreover, Valero has high geographical diversity and complexity, providing the greatest reach for highest-value products across the US, the report said.
The report, coming after RILs AGM earlier this week where chairman Mukesh Ambani hinted at scaling up its current businesses and acquiring new ones, said the company is well positioned for a buy in the US at the moment. RIL commissioned its 580-kbpd high-end refinery earlier in the year and, hence, requires a large discerning consumer base.
Given its larger share of Euro IV/V-compliant gasoline in the product state, the US would be the natural market for the new refinery. Given the unattractiveness of the domestic retail fuel market, superior quality of products and its larger production capacity, RIL will benefit from greater control of an overseas distribution network to maximise its returns, the Macquarie report states.
Moreover, RIL has the financial muscle to pull off an acquisition. It holds $4 billion in Treasury stock, and if it doubles its current net debt-to-equity of 0.35x, it can borrow another $10 billion.
The largest refining & marketing company in the US has an enterprise value of $12 billion, and the others are less than $7 billion, the report adds.
When asked about RILs plans for US acquisitions, an RIL spokesperson said, Reliance Industries is reviewing a number of global opportunities for growth in its core business. The difficult operating environment of the past year has made available several interesting opportunities, where an investment by a strategic operator of industrial assets can add substantial value. The review is ongoing and there can be no assurance that any approach will be made with respect to the opportunities under review or that any such approach will result in a transaction.
Besides, the Macquarie report claims the timing for the proposed acquisition by RIL is crucial as weak demand, coupled with increased capacity, have plunged the companys gross refining margins to $1.3 per barrel, well below the average operating cost of most refineries.
The report observed, The long-term economics of US refiners-cum-retailers suggests that 22% of the most attractive/prominent sites for auto fuel retail in North America contribute nearly 71% of net profits. Product differentiation, especially branded products, is essential to enhancing returns. However, the large auto fuel retailers could be RILs primary targets.