27-02-09 Reliance Industries Ltd. (RIL), owner of the world's largest refining complex, plans to acquire the remaining shares of unit Reliance Petroleum Ltd. (RPL), after the stock dropped 54 % in the past year.
Chevron will sell its 5 % Reliance Petroleum stake to Reliance Industries, the Indian company said.

Directors will consider the plan on March 2, Mumbai-based Reliance Industries said. Reliance Industries holds a 70 % stake in Reliance Petroleum.
Reliance Petroleum started a 580,000-bpd 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-bpd 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. "Reliance Industries shareholders are likely to be disappointed."
Reliance Industries is currently valued at $ 40 bn, compared with $ 6.9 bn for its unit. One Reliance Industries stock is worth the equivalent of 16 of its unit's shares. Reliance Industries didn't say how the proposed merger would take place.

Oil demand
Reliance Industries and its refining unit had their stock price targets and earnings estimates cut by JP Morgan 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, JP Morgan said. The key risk is a worse-than-expected economic environment pushing down global refining and petrochemicals margins further, it said.
"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. "It depends a lot on what the swap ratios may be."

Refinery margins
Chevron, which acquired 5 % of Reliance Petroleum at 60 rupees apiece in April 2006, had the option to increase its share in the project to 29 %. 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 US Securities and Exchange Commission on Feb. 26.
Reliance Industries has the option to buy Chevron's stake at 60 rupees a share if the US company doesn't increase it, according to Reliance Petroleum's share-sale document. That would be at a 21 % discount to Reliance Petroleum's current price.

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 would be 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 bn rupees in stock and assumed debt. It offered one new share for every 11 shares of the refiner to buy back the 36 % it didn't own at the time.