Reliance announced energy asset sales worth around USD 16 billion; end of the investment cycle in telecom; bringing net-debt to zero in 18 months; value-unlocking options for real estate and financial assets; listing of telecom and retail in five years; and focus on dividends.
Reliance Industries selling a fifth of its oil and chemical assets to Saudi Aramco and nearly half of its fuel retail operations to BP, will make the company’s energy business nearly debt-free but will lower its consolidated earnings and operating cash flow, brokerages said on Tuesday. On the announcement made by Reliance Industries Chairman Mukesh Ambani on Monday, Morgan Stanley said that over the past three months, the firm has underperformed the Sensex by about 11 percentage points on weakness in refining margins and decline in key chemical spreads.
Reliance announced energy asset sales worth around USD 16 billion; end of the investment cycle in telecom; bringing net-debt to zero in 18 months; value-unlocking options for real estate and financial assets; listing of telecom and retail in five years; and focus on dividends. Reliance announced agreeing to a non-binding letter of intent from Saudi Aramco for a proposed investment in its refining, petrochemicals, and fuel marketing business.
Besides, it is selling a 49 per cent stake in fuel retail business to BP for Rs 7,000 crore (about USD 1 billion). It plans to sell a 20 per cent stake in the oil and chemicals business at an enterprise value of USD 75 billion while sourcing 5 lakh barrels per day of oil from Saudi Aramco.
The transaction, at an initial-stage for now, will be subject to due diligence, definitive agreements, regulatory and other statutory approvals. “Once completed, we estimate the stake sale will make RIL’s energy business nearly debt-free, but it will lower RIL’s FY21 consolidated earnings by 9 per cent and operating cash flow by 14 per cent,” Morgan Stanley said. Also, monetisation of energy assets (fuel retail to BP, oil and chemicals to Saudi Aramco), coupled with the announcement of an end to investment cycle in telecom, would help in deleveraging the balance sheet after nearly seven years.
“RIL has highlighted plans to go to zero-debt by end-F21 (March 2021), but we saw announcements that could lower debt/liabilities by a third and await more details on its future plans,” it said. Kotak Institutional Equities Research said RIL may be required to create a carve-out or special purpose structure, instead of a subsidiary, for the oil-to-chemical (O2C) business under the standalone entity for its proposed transaction with Saudi Aramco to ensure fungibility of cash flows and prevent leakage of taxes.
“The amount of debt/liabilities to be transferred with O2C business and other contours, including long-term crude sourcing arrangement and growth capex, will be finalised in due course,” it said. RIL may receive 50 per cent payment at the time of closure of the proposed transaction and 25 per cent each in two tranches over the next two years. Stating that details of crude sourcing from Saudi Aramco are limited, Morgan Stanley said if RIL is able to source heavy barrels, it could reduce the recent challenges refiners have faced in sourcing heavy Middle Eastern crude barrels.
The deal is expected to get completed in FY20. It said refining margins weakened for most of the past quarter amid almost no growth in oil demand and high crude premiums on heavy crude. However, the market has started to rebalance and margins on key products like diesel and gasoline are significantly improving. Also, margins on PX and MEG (which account for nearly 30 per cent of chemical production), have declined over the past two quarters, it added.