Aramco Plans to Buy Reliance Refining Stake as Earnings Drop

(Bloomberg) -- Saudi Aramco plans to buy a stake in the refining and chemicals business of India’s Reliance Industries Ltd., moving to diversify from Saudi Arabia as its first half-year earnings report showed a drop in net income.

The purchase by Aramco, the largest oil exporter and the most profitable company in the world, precedes a planned public offering that could be held as early as next year. Profit slid 12% to $46.9 billion in the first six months as crude prices fell and costs rose, the state-owned company said Monday.

“In downstream we will further profitably diversify our operations and increase petrochemicals production,” Khalid Al-Dabbagh, senior vice president for finance, strategy and development, said in an interview. The details of the agreement with Reliance remain in the “early stages,” he said.

The deal will allow Aramco, officially known as Saudi Arabian Oil Co., to expand its chemicals business as it seeks to reduce reliance on sales of crude. Saudi Crown Prince Mohammed bin Salman, who runs the country day to day, is pursuing a radical program to diversify the economy and can tap the company’s strong balance sheet to finance his plans.

For Reliance, the cash from Aramco will help reduce debt that’s been pushed up by a headlong expansion into new sectors such as telecommunications.

Aramco will buy a 20% stake in the company’s oil-to-chemicals business, including the 1.24 million-barrel-a-day Jamnagar refining complex on India’s west coast, Reliance Chairman Mukesh Ambani said in Mumbai. Reliance values its oil-to-chemicals division at $75 billion including debt, implying a $15 billion valuation for the stake.

Cash, Dividend

Despite the decline in profit at Aramco, the state oil giant increased cash flow and raised its dividend to almost match net income, giving a special payout to the government. Those are key concerns for potential investors ahead of an initial public offering planned for 2020 or 2021.

Aramco will hold its first-ever earnings call with investors later Monday as it tiptoes toward the greater disclosure required of public companies. It published annual financial statements for the first time in April, ahead of a $12 billion bond sale. An IPO would put the Saudi giant under even greater scrutiny from investors and invite comparisons with other oil majors.

“We have some of the largest and most productive reservoirs on Earth that are 100% operated by us; we have the lowest production and finding costs; and we have the highest reliability and security of supply,” Al-Dabbagh said. “This all results in the best financial performance that any investors -- whether debt or equity -- would look for when evaluating a company.”

The average selling price for Aramco’s crude fell to $66 a barrel in the period from $69 a year earlier, while crude production held steady at 10 million barrels of oil equivalent a day. Unlike most other energy companies, Aramco’s output is controlled by the state -- the world’s biggest oil exporter -- and the royalties and taxes it pays underpin the Saudi economy.

The kingdom’s dependence on Aramco to finance government spending places a heavy burden on the company’s cash flow. Aramco pays 50% of its profit in income tax, plus a sliding royalty scale that starts at 20% of the company’s revenue and rises to as much as 50% with the price of oil.

Even so, free cash flow increased almost 7% to $38 billion in the first half as a result of working-capital movements and lower capital spending. Aramco paid dividends of $46.4 billion, including an additional $20 billion to the government as a special payout. Income taxes shrank 5.4% to $45.6 billion.

“We saw the payout ratio increase to 100% of net income, that was the stand-out from the results,” Neil Beveridge, an analyst at Sanford C. Bernstein & Co., said in a Bloomberg television interview. “On a $1 trillion market-cap valuation, it would imply a yield of somewhere around 9%.”

Saudi Arabia wants to raise a record $100 billion from selling a 5% stake in Aramco, which would make it the biggest IPO in history and a windfall for any banks that win a role. The kingdom has valued the Damman-based company at a whopping $2 trillion, though the firm’s 2018 financials indicated a valuation closer to $1.2 trillion.

What Bloomberg Intelligence Says:

“Speculation has re-emerged that Saudi Aramco’s widely-anticipated IPO is being prepared, though we still see numerous political obstacles along with the large discrepancy between the likely public valuation and expectations set by Crown Prince Mohammed bin Salman.”

Salih Yilmaz and Rob Barnett, energy analysts
Click here to read the research

Saudi Arabia announced plans for an IPO of Aramco three years ago, but the sale was delayed to allow the company to acquire chemicals giant Saudi Basic Industries Corp. Aramco sold bonds to buy a 70% stake in Sabic from the kingdom’s sovereign wealth fund.

The oil company has completed internal preparations to sell shares, Al-Dabbagh said Monday, reiterating that the decision on when to go ahead with a listing, and on which exchange, rests with the Saudi government.

©2019 Bloomberg L.P.

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