Coronavirus (COVID-19) and its negative impact on the oil prices have pulled down Reliance Industries' (RIL) refining and chemical valuation by $7 billion. This, analysts say, could impact RIL's debt reduction plans, delaying the 20% stake sale valued at $15 billion to Saudi Aramco in its oil-to-chemicals business.
"We lower reﬁning margin expectations for FY21/22E due to negative shock to oil demand from the coronavirus. We estimate the sharp decline in RIL’s share price is implying that the value of the reﬁning and chemical segment has halved versus the start of the year. The valuation for reﬁning and chemical business comes down from $77 bn to $70 bn," said Goldman Sachs in its report dated 9 March.
Fall in crude oil prices dragged down shares of RIL as much as 13.68% on Monday, its worst percentage fall since October 2012. RIL's scrip closed at ₹1113.15, down 12.35% on BSE.
RIL had announced the stake sale in August 2019 wherein it had signed a non-binding letter of intent with Saudi Aramco. The RIL-Aramco deal will be the biggest foreign investment in “the history of Reliance" and amongst the largest foreign investments into India, the company had said.
"The current scenario impacts valuations and therefore the deal may get further delayed," said an analyst on the condition of anonymity.
RIL had this January said that the deal will miss the March 31 timeline announced earlier.
In its worst fall since the 1991 Gulf War, Brent on Monday slumped to $31.02 a barrel. Goldman Sachs analysts expect prices may touch $20 per barrel mark.
Paris-based International Energy Agency (IEA) on Monday revised lower global demand for the first time since 2009 in the backdrop of alarming spread of Covid-19. IEA expects a 90,000 barrels a day decline in demand when compared with 2019, thereby reducing global oil consumption estimate to 99.9 million barrels a day in 2020.
“This is a sharp downgrade from the IEA’s forecast in February, which predicted global oil demand would grow by 825,000 barrels a day in 2020," the Paris-based agency said in its forecast.
RIL's shares may have been declining in a falling market but it remains top pick for Goldman Sachs. “The 18% correction in RIL’s share since the outbreak of coronavirus in mid January (vs Sensex down 10%) appears overdone, and we reiterate our Buy rating with 38% potential upside," said Goldman Sachs.
Declining jet fuel demand with rising daily flight cancellations has affected refining margins. With about 48,000 flights cancelled globally, reducing demand by up to 0.7kbpd. "Since jet fuel and diesel are both mostly interchangeable, it's hurt about half of RIL’s refinery output. However, a decline in crude official selling price has cushioned most of the impact," said Morgan Stanley in its research dated 8 March.
The current oil price also negates the benefits RIL had estimated to derive out of its petcoke gasifier. The company had over the last few years invested $7bn in its petcoke gasifier which could have brought in an additional dollar of refining margin per barrel.
"We are now assuming no benefits from this for F21. Lower oil prices and cheaper LNG make its less viable to operate the gasifier. However, we see part of the benefits playing out via lower operating costs as LNG prices remain low at $3-4 per mmBtu," added Morgan Stanley in its research dated 8 March.