Aramco capex cut may hurt BPCL divestment

Slippery future: Saudi Aramco is planning to cut its capital expenditure to $25-billion to $30 bn from the original plan of $35- billion to $40 bn.   | Photo Credit: AP

The world’s largest oil firm Saudi Aramco’s decision to cut its capital expenditure (capex) by $10 billion is likely to hurt the divestment of Bharat Petroleum Corporation Limited (BPCL) and also the oil giant’s plans to buy a 20% stake in Reliance Industries Ltd.’s oil-to-chemicals business, according to analysts.

Saudi Aramco is planning to cut its 2020 capex to $25- 30 billion from the original $35-40 billion amid concerns over oil demand owing to the outbreak of COVID-19.

The oil major’s capex stood at $32.8 billion in 2019.

Saudi Aramco’s decision may have a direct bearing on the government’s plan to divest its 52.98% stake in BPCL as Saudi Aramco was seen as one of the front runners to buy the stake.

According to Saudi Aramco’s annual report, the company will focus on downstream in high-growth markets, including India.

BPCL’s market capitalisation has dropped by more than half to ₹56,910 crore as on Tuesday compared to almost ₹1,20,000 crore in November 2019.

BPCL shares on Tuesday closed down 2.62% to ₹262.35, valuing the company at ₹56,910.35 crore. At current price, governments 52.98% stake will be valued at ₹30,151 crore.

“It will be very difficult for the government to sell BPCL at this valuation,” said a Mumbai- based oil analyst.

Aramco’s focus now is to increase oil production up to 12.3 million barrels per day (mbpd) compared with its average production of 9.7 mbpd amid an oil price war.

Even as Aramco’s management is confident of meeting investors’ 2020FY earnings / dividend expectations even if oil price remains at about $30, the company will consider modifying 2021FY capex plan.

Stock price correction

Nomura, while raising its weight on Reliance Industries (RIL) due to lower oil prices, said the recent correction in stock price (down 33% vs. Nifty down 28%) factors in potential failure to close the Saudi Aramco deal and lower refining and petrochem margins.

Saudi Aramco, in a conference call, stated that it was still conducting due diligence on a potential investment in RIL’s oil-to-chemicals operations.

Once the evaluation was complete, it would move to the next stage of the approval process.

RIL management, in its Q3 earnings briefing, reiterated that its March 2021 deleveraging target remained unchanged and was not conditional on any transaction (such as Aramco).

“We note that the RIL stock price is down 34% from its peak (in December 2019) and below the price at which they had announced stake sale to Aramco — implying the market is not factoring in this transaction,” said BofA Securities in research note to its clients.

“Aramco has the capability to close both the deals simultaneously as they believe their oil will last till eternity. They want long term buyers for Saudi oil.

“However, given the market conditions, the valuations of the both the deals could change to a great extent,” an official of an oil PSU told The Hindu.

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Printable version | Oct 27, 2021 9:33:57 AM |

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