Reliance to Buy Chevron Stake, Absorb Reliance Petroleum Unit

Feb. 28 (Bloomberg) -- Reliance Industries Ltd., owner of the world’s largest refining complex, will buy Chevron Corp.’s 5 percent stake in Reliance Petroleum Ltd. as part of the Indian company’s plan to acquire the remaining shares of its unit.

The board will consider the acquisition of the 30 percent of Reliance Petroleum not already owned by the parent company on March 2, Mumbai-based Reliance Industries said in a statement to the Bombay Stock Exchange yesterday.

Reliance Petroleum started a 580,000-barrel-a-day refinery in December at a time of excess industry capacity and declining earnings from processing oil because of a slump in global demand for gasoline and diesel. The new plant is adjacent to its parent’s 660,000-barrel-a-day refinery at Jamnagar in Gujarat.

“Reliance Industries’ margins are already under pressure and Reliance Petroleum will add to this,” said Vinay Nair, an analyst at Khandwala Securities Ltd., who has a “buy” rating on the parent company’s stock. “Reliance Industries shareholders are likely to be disappointed.”

The plan to acquire the remaining shares comes as Reliance Petroleum has dropped 54 percent in the past year. Reliance Industries issued the statement on purchasing the Chevron stake late last night.

Chevron’s 2006 investment in Mumbai-based Reliance bucked the trend among companies such as Royal Dutch Shell Plc and BP Plc, who were scaling back or quitting Indian energy projects because of government price controls that reduced profits from fuel sales.

Purchase Option

Reliance Industries has the option to buy Chevron’s stake at 60 rupees a share if the U.S. company doesn’t increase it, according to Reliance Petroleum’s share-sale document. That would be at a 21 percent discount to Reliance Petroleum’s current price. Based on that price, Chevron would get $265 million for the stake, equivalent to about 14 hours of sales.

Chevron acquired 5 percent of Reliance Petroleum at 60 rupees apiece in April 2006 and had the option to increase its share in the project to 29 percent.

The San Ramon, California-based oil company had until July 27, or three months after the plant is fully commissioned, to decide whether to raise its stake, Chevron said in a filing with the U.S. Securities and Exchange Commission Feb. 26.

Chevron had intended to use its share of output from the new refinery to supply other Asian markets where prices are higher than in India, and to shoehorn its way into potentially more profitable endeavors on the subcontinent, such as oil and natural-gas exploration.

Current Valuation

Reliance Industries is currently valued at $40 billion, compared with $6.9 billion for its unit. One Reliance Industries share is worth the equivalent of 16 of its unit’s shares, according to Bloomberg calculations. Reliance Industries didn’t say how the proposed merger would take place.

Reliance Petroleum closed at 76.35 rupees in Mumbai. Reliance Industries declined 1.9 percent to 1,266.05 rupees in Mumbai trading. The stock has fallen 51 percent in the past year.

Reliance Industries and its refining unit had their stock- price targets and earnings estimates cut by JPMorgan Chase & Co. on Feb. 18, which cited a faster-than-expected decline in global oil demand.

The current uncertainty on the global economic environment could lead to greater earnings uncertainty in global cyclical businesses, JPMorgan said. The key risk is a worse-than-expected economic environment pushing down global refining and petrochemicals margins further, the firm said.

‘Good News’

“Given the subdued outlook for refinery margins for the next couple of years, this is good news for shareholders of Reliance Petroleum,” said Deepak Pareek, an analyst at Mumbai- based Angel Broking Ltd. “It depends a lot on what the swap ratios may be.”

The refineries operated by Reliance Petroleum and its parent, owned by billionaire Mukesh Ambani, can process heavy, sour varieties of crude oil, which are cheaper, and convert them into higher-value products such as gasoline and diesel.

This is the second time that Reliance Industries has absorbed a refining unit. Reliance Industries bought a unit, also known as Reliance Petroleum, in 2002 for 80 billion rupees in stock and assumed debt. It offered one new share for every 11 shares of the refiner to buy back the 36 percent it didn’t own at the time.