Mukesh Ambani Sells 20% Oil Biz Stake to Saudi Aramco to Cut Off Debt

New Delhi: Reliance Industries Limited (RIL) chairman and managing director Mukesh Ambani on Monday announced sale of 20% stake to Saudi Aramco, in an effort to cut off his company’s debt. Terming it as ‘India’s largest foreign investment’, Ambani made the announcement during RIL’s 42nd annual general meeting in Mumbai. He also unveiled several other future plans of the Group including the launch of Jio Fibre, fibre-to-the-home service and Jio Forever Plans under which users will get an HD or 4k LED television and 4k set-top box for free, further expanding RIL's hold in the country's telecom sector.

Ambani said Saudi Aramco would acquire a 20% stake in RIL's oil-to-chemicals (OTC) or refining and petrochemicals business at an enterprise value of $75 billion. “Saudi Aramco will also supply 500 barrels of crude oil on a long-term basis to RIL's Jamnagar refinery. This signifies perfect synergy between the world's largest oil producer and the world's largest integrated refinery and petrochemicals complex,” he said. 

RIL operates two refineries in Gujarat’s Jamnagar, with a total capacity of 68.2 million tonnes per annum.

Recently, brokerage firm Credit Suisse in its latest report had downgraded the RIL stock to ‘underperform’, while stating that the Group is expected to remain free-cash flow negative over FY20-21 too, as its liabilities have gone up to $65 billion in FY19 from $19 billion in FY15.

On August 12, for the first time in its history, Aramco announced its half-year financial results of the year. The company’s net income was $46.9 billion for the first half of 2019, compared with $53.0 billion for the same period last year. It stated: “Earnings before interest and tax (EBIT) was $92.5 billion, compared with $101.3 billion a year earlier. Free cash flow was $38.0 billion, compared with $35.6 billion for the same period last year. Capital expenditure was $14.5 billion, compared with $16.5 billion for the same period in 2018.”

In the recent past, Aramco has been aggressively expanding its business operations. In May, Aramco announced a mega preliminary agreement to buy 5 million tonnes of liquefied natural gas per year from a Port Arthur, a Texas export project which is currently under development in the United States.

As per Aramco’s website, the company claims to be the world’s largest integrated oil and gas company and its upstream operations are based in the Kingdom of Saudi Arabia and it also operates a global downstream business.

Furthermore, RIL is set to receive Rs 7,000 crore ($990 million) from the UK's BP Plc as it entered a deal with the European oil major selling the company a 49% stake in its fuel retail business. Last week, the companies said they’d agreed to form a new joint venture that will take over 1,400 retail fuel stations run by Reliance along with its aviation fuels operations at more than 30 airports across India. 

As per an analysis by the Economic Times, these two deals with Aramco and BP will substantially help RIL in reducing its debts. Citing data from Credit Suisse that the total liability of the RIL reached $65 billion in FY19 compared with FY15, the report says “the fund proceeds from Aramco and BP will result in zero net debt. The deal may possibly turn the non-telecom assets debt free.”

However, considering RIL’s aggressive expansion in energy and telecom sectors besides its massive debt, one has to wait to see how Ambani’s strategies unfold.