Saudi Aramco remains in discussion with for a potential deal to buy a 20 per cent stake in its oil-to-chemical (O2C) unit, Morgan Stanley said on Monday citing the Saudi firm’s analyst call post announcing 2020 earnings.

Richest Indian Mukesh Ambani had in August 2019 announced talks for the sale of 20 per cent stake in the O2C business, which comprises its twin oil refineries at Jamnagar in Gujarat and petrochemical assets, to the world’s largest oil exporter. The deal was to conclude by March 2020 but has been delayed.

“Saudi Aramco’s CY20 conference call indicated that it is still in discussion with Reliance to evaluate existing opportunities as potential partners, regarding the non-binding MoU signed with Reliance for its O2C business,” Morgan Stanley said in a note.

Besides refineries and petrochemical plants, the O2C business also comprises a 51 per cent stake in the fuel retailing business. It, however, does not include the upstream oil and gas producing assets such as the flagging KG-D6 block in the Bay of Bengal.

Reliance had in 2019 put USD 75 billion as the value of O2C business after signing a non-binding letter of intent with Saudi Aramco.

“Saudi Aramco remains in discussion with Reliance for potential partnership,” Morgan Stanley said.

With asset prices, industry outlook, and margins back to August 2019 levels, it saw a revival of the earnings upgrade cycle, led by energy. Multiples should surprise positively too as clarity on new energy investments rises.

“Reliance had recently announced carving out the O2C business as a separate subsidiary to support strategic partnerships and new investors in order to accelerate its new energy and material plans,” it said. “We expect the stake sale discussions to pick up the pace – we see valuations and asset prices rebounding to levels seen in August 2019 with a much-improved industry outlook.”

Aramco buying 20 per cent in O2C business would allow Reliance to build financial muscle as it carves out space for itself in highly competitive omnichannel retail.

With a stake, Aramco would not only have a stake in one of the world’s best refineries and largest integrated petrochemical complex.

It has also access to one of the fastest-growing markets, a ready-made market for 5 lakh barrels per day of its Arabian crude and offering a potentially bigger downstream role in future.

Reliance refineries are one of the most complex in the world, allowing it to earn a significant premium to the benchmark Singapore gross refining margin. Its petrochemical complexes rank among the biggest in the world, whose dependency on outside raw materials is minimal. It has leadership positions both in the domestic polymer and polyester markets.

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