ET Intelligence Group: At a time when valuations of global refining and petrochemical companies are compressing and trading at mid-cycle valuation multiples, investors are seeking answers to Saudi Aramco’s decision of paying a premium for Reliance Industries’ (RIL) refinery and petrochemical assets.
The implied EV/EBITDA, based on the enterprise value of $75 billion, works out to be 7.2-8.3 times, while the global refinery and petrochemical stocks have a median of 7.02 times, according to Bloomberg.
Valero Energy, the world’s largest independent petroleum refiner with a combined throughput capacity of 3.1 million barrels per day, is trading at 5.37 times its projected 2020 earnings. RIL’s throughput capacity stands at 1.24 million barrels per day.
There are a couple of reasons the world’s biggest crude producer is paying a premium for RIL’s assets.
First, the deal with RIL gives it access to one of the fastest-growing markets for petroleum products, particularly at a time when oil demand is thinning in the developed markets.
India is the third-largest oil-consuming nation in the world after the US and China, and consumption reached 5.15 million barrel a day in 2018, according to energy statistics of British Petroleum. Oil consumption in India grew by 5.9 per cent in 2018, compared with 1.5 per cent global average. Aramco will fulfil around 36 per cent of total crude oil needs of Reliance.
Second, RIL has one of the most complex refineries in the world. Its Nelson complexity index — a measure of refinery complexity — rose to 21.1 after the recent upgradation, from 12.7.
Consequently, the company’s gross refining margins (GRM) maintain a premium of $4-5 per barrel compared with Singapore GRM, a benchmark for regional GRMs. With diesel constituting nearly 45 per cent of total output, the company is the key beneficiary of upside from new fuel emission norms by the International Maritime Organization.
According to new fuel norms for ships, vessels must use fuel having sulphur content less than 0.5 per cent against the current limit of 3.5 per cent to reduce greenhouse gas emission.
To use lower sulphur fuel, ships could start using blended diesel, and this could lift crack spread (or the effective realisation per barrel) from the middle distillate.
Finally, Saudi Aramco must deploy its free cash flow to generate a meaningful return in the long-term. According to the financials of the first half of 2019, Saudi Aramco generated around $38 billion of free cash flow. The cash outflow for RIL assets is just 20 per cent of the total FCF of a year if one annualises the current run-rate.

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