Billionaire Mukesh Ambani’s Reliance Industries has announced the outlines of splitting its petroleum refining, fuel marketing and petrochemical (petroleum-chemical) businesses into an independent unit with a $ 25 billion loan from the parent company, as it seeks to unlock value by settling stakes with global investors like Saudi Aramco.
The spin-off of Reliance O2C Limited (O2C) will enable the targeted pursuit of opportunities throughout the petroleum to chemicals value chain, improve efficiency through an autonomous capital structure and a dedicated management team, and attract pools of dedicated investor capital, according to a presentation of the company filed with the stock exchanges.
The transfer of twin refineries in Jamnagar in Gujarat, petrochemical sites in several states and a 51% stake in the fuel retail business to O2C will be on a ‘low cost’ basis, under reserve the required approvals which are expected to arrive by September.
However, upstream oil and gas production fields such as KG-D6 and textile businesses will not be part of the new unit, where it aims to retain a significant controlling stake.
Consideration for the transfer will be in the form of a long-term interest-bearing debt of US $ 25 billion to be issued by O2C to Reliance Industries Ltd (RIL). It is proposed that RIL’s external debt remains with RIL only.
When completed, RIL – the company founded by Dhirubhai Ambani in the late 1960s – will only house upstream oil and gas exploration and production, financial services, group treasury and operations. textiles, and will act as the group’s holding company. .
The retail business is owned in Reliance Retail Ventures Ltd and the telecommunications and digital companies are nested in Jio Platforms Ltd.
Long-term loans issued by O2C to RIL, as part of the reorganization, will provide an efficient mechanism for upstream liquidity generated from O2C to RIL, according to the presentation.
RIL is in talks with the Saudi Arabian Oil Company (Saudi Aramco) to sell a 20% minority stake in its O2C business, which, if successful, should lead to further deleveraging of the company.
While Moody’s Investors Service said the separation of O2C’s business “will facilitate a potential sale of stake to Aramco, potentially allowing further reduction in RIL’s net debt,” Fitch Ratings said the reorganization “will have a neutral impact. on RIL’s credit metrics and rating “.
The assets of the 100% owned O2C unit will be funded by the interest-bearing loan, which will be an “effective mechanism for upstream liquidity, including any possible inflows,” in the unit, RIL said. .
RIL will provide a $ 25 billion loan to subsidiary O2C at a variable interest rate, with the subsidiary having approximately $ 42 billion in assets (28 percent of consolidated assets). Even if the assets of O2C will be transferred to a new branch, its debt will continue to be inside RIL.
In August 2019, RIL had agreed to upstream Rs 1.08 lakh of debt from Jio to make his telecommunications company debt-free, before attracting strategic and financial investors like Facebook, Google and KKR.
RIL sold a 33% stake in digital services to global investors, including Facebook and Google, for Rs 1.52 lakh crore and 10% in its retail subsidiary to global investors for Rs 47,265 crore.
In addition, the proceeds from the rights issue of Rs 51,124 crore of RIL contributed to the net debt exemption status.
RIL owns 85.1% of Reliance Retail and 67.3% of Jio Platforms.
In December 2020, RIL’s gross debt stood at Rs 2.57 lakh crore.
RIL is also working on a structure where the interest costs that the O2C branch will incur for the purchase of the assets will be equal to the interest costs that the parent company RIL incurs on its outstanding loans.
“The reorganization of the O2C business facilitates the participation of strategic investors and renowned industry-focused investors,” the company said, adding that it would have no impact on RIL’s consolidated financial data as well as on high quality international and domestic credit ratings.
RIL also announced its goal of working with the O2C company to reduce its carbon footprint and become “net carbon zero” by 2035.
His vision includes investing in the development of renewable energy systems to meet energy demand and accelerate the transition from traditional carbon-based fuels to hydrogen.
Reliance O2C Limited is home to petroleum and petrochemical refining and manufacturing assets, bulk and wholesale fuel marketing, and RIL’s 51% stake in the retail fuel joint venture with UK BP .
The O2C unit also houses the company’s petroleum trading and marketing subsidiaries in Singapore and the UK, Reliance Industries Uruguay Petroquimica SA.
It is also home to Reliance Ethane Pipeline Limited which operates a pipeline between Dahej in Gujarat and Nagothane in Maharashtra as well as a 74.9% stake Reliance holds in the joint venture with Sibur.
These are very large ethane carriers, gas pipelines such as the one that carries coalbed methane from its CBM blocks, the offshore oil and gas asset holding company Reliance Industries (Middle East) DMCC, and domestic exploration and production assets would not be part of the O2C. unity.
In addition, RIL’s textile business, operated from the Naroda site, Baroda Township and land including cricket stadium, Jamnagar power assets, and Sikka Ports and Terminals Limited would also not be included. of the O2C unit.
RIL owns and operates twin oil refineries in Jamnagar, Gujarat, with a combined capacity of 68.2 million tonnes per year.
It is also the country’s largest petrochemical maker with units in Jamnagar, Dahej, Hazira, Nagothane, Vadodara, Patalganga, Silvassa, Barabanki and Hoshiarpur.
The company owns a 66.6% stake in the KG-D6 block where it is investing approximately $ 5 billion in the development of a second round of gas discoveries with BP.
It also owns a similar stake in the NEC-25 block in the Bay of Bengal and operates two CBM blocks in Madhya Pradesh. These upstream assets are not part of the O2C unit.