Friends in need

The RIL-Aramco deal could be the forerunner to further reforms in the PSU refining space

The world’s largest company by profit joining hands with India’s largest company by profit is an event that celebrates scale. The convergence of interest conveys interesting insights about the two partners. Saudi Arabian Oil Company and Reliance Industries are headed by ambitious inheritors. Both are seeking validation from the retail segment. Mohammed bin Salman, the titular head, is firming up plans to take the state-run explorer public. After offering cheapest data downloads in the world, Mukesh Ambani wants to list Reliance Jio in five years.  The effective ruler of the desert kingdom and India’s richest man want to hedge the downside risk of their flagships by looking at other markets. They have tasted blood. A bond offering by Aramaco mopped up US$ 12 billion in April. Besides the US$ 15-billion investment in the oils-and-chemicals business, UK-based BP will pump in Rs 7000 crore to buy a 49% stake in a joint venture with RIL to run a network of retail pumping stations and enter the aviation fuel business. Global investors’ embrace of the crown prince indicates that the overhang of the murder of a dissident journalist last year is fading. Becoming the world’s largest telecom services provider by subscribers has busted the belief that the Ambani family’s success was restricted to the B2B marketplace. Saudi Arabia’s latest overseas investment will expand its downstream footprints and entice investors with the prospect of the declining revenues getting a boost. Assured annual supply of 25 million tonnes of crude oil will insulate RIL from geo-political shocks.

The teaming up is not only because of the opportunities. There are compulsions, too. The fiscal deficit of Saudi Arabai is expected to nearly double than that estimated for the current calendar year as earnings from export of energy falter. The IMF has projected a threshold of US$ 80 a barrel for the world’s largest oil producer to stay afloat. Though doubled since the beginning of 2016, prices have halved in the last eight years as recessionary conditions prevail in the euro region and China’s slowdown looks set to become a trend rather a blip as trade tension with the US is expected to linger well into end 2020, when Donald Trump faces re-election. The slight acquisition premium compared with international peers gets Aramco an operational refiner, thereby circumventing the obstacles created by environmentalists to the US$44-billion proposed green-field partnership with Abu Dhabi National Oil Company in Maharashtra’s Ratnagiri district. High leverage is hampering RIL’s hunger for cash to deploy into emerging areas to compensate for the sluggish growth of the petroleum business as the world shifts from fossil fuels to electric vehicles. Cash EPS is down 40% and the operating profit margins of the group have contracted 226 basis points over three years. The gross refining margins were at an 18-quarter low end June 2019. Net cash-flow from operations halved in the latest financial year over a year ago. Outstanding liabilities of nearly Rs 3 lakh crore are more than double the cash reserves, with most of it going to fuel Reliance Jio’s run. The stock surged 10% in a day on the reckoning that the recent capital infusion will wipe out RIL’s debt by next fiscal year, leaving room for enhanced payouts and borrowings.

Going beyond how the collaboration will help repair the balance sheets of the two companies, the larger message is about the outlook of the global and domestic economy. That Dhirubhai Ambani’s heir is willing to part a chunky stake for the first time to a foreign competitor in the promoter-driven indigenous conglomerate is a reiteration of the recent trend of Indian companies collaborating with or surrendering to external competition. Home-grown Flipkart has been snapped by Walmart, while Idea Cellular has joined hands with Vodafone. It confirms the diminishing role of oil as a lubricant of the global economy. The world’s most valuable company is not a decades-old US onshore or offshore prospector but a relatively young New Economy player. The short-term benefits for India will be narrowing of the current account deficit and stabilizing of the rupee when the dollars flow in. The era of arbitrarily tinkering with central and states taxes on petroleum products to meet expenditure requirement is probably on its last leg as foreign investors will seek stability to avoid disrupting their growth trajectory. India might even be willing to hike the 49% FDI ceiling in processing and marketing PSUs on the road to withdrawal of subsidy support. Freeing the entire value chain from price controls will be the next logical step. If there are any winners or losers of the recent tie-up will depend on how quickly the stakeholders adapt to the changing times.  

-Mohan Sule