Reliance to Spin-off its Oil-to-Chemical Business into an Independent Unit

By- Ashwathy Nair

• A 51% stake in the fuel retailing business to O2C will be on a ‘slump sale bases’.
• KG-D6 & textiles business won’t form part of a new unit.
• External debt of RIL is proposed to remain with RIL only.

Reliance Industries of Billionaire Mukesh Ambani announced the contours of spinning-off its oil refining, fuel marketing and petroleum (which is an oil-to-chemical) Business into an independent unit with a USD 25 billion loan from the parent, as it seems to unlock value by setting stakes to global investors such as Saudi Aramco.

The carving out of Reliance O2C Limited (O2C) will be enabling the focused pursuit of opportunities across the value chain of oil-to-chemicals by improving efficiencies through the self-sustaining capital structure as well as a dedicated management team, and it will be attracting dedicated pools of investor capital, as per a company presentation filed with the stock exchanges.

Subject to the mandatory approvals that are expected to arrive in September, the shift of twin refineries at Jamnagar in Gujarat, petrochemical sites in several states, and a 51 per cent stake in the fuel retailing sector to O2C would be on a ‘slump sale basis.’

However, KG-D6 and textiles business, which is an upstream oil and gas production fields will not be forming part of the new unit, where it focuses on to maintain a significant majority stake.

The refund for the move would be in the form of USD 25 billion long-term interest-bearing loans to be given by O2C to Reliance Industries Ltd. (RIL). The external debt of RIL is suggested to remain with RIL only.

Once completed, RIL, which is the company that was founded by Dhirubhai Ambani in the late 1960s will be housing only the upstream oil and gas exploration and production business, group treasury, financial services and legacy textile businesses and it will act as a holding company of the group.

In Reliance Retail Projects Ltd, the retail sector is kept and telecom and digital companies are nested in Jio Platforms Ltd.

As a part of the reorganization, long-dated loans that were issued by O2C to RIL will be providing an efficient mechanism to upstream cash generated from O2C to RIL.

RIL has been in ongoing negotiations with the Saudi Arabian Oil Company (Saudi Aramco) to sell a 20 per cent minority interest in its O2C firms, which could lead to more economic contraction of the company if successful.

While, the separation of O2C business that was said by the Moody’s Investors Service “will be facilitating a potential stake sale to Aramco, which will possibly be enabling a further reduction in net debt of RIL,” Fitch Ratings stated the reorganization “will be having a neutral impact on credit metrics and rating of RIL.”

The assets of the wholly-owned O2C unit will be financed by an interest-bearing loan, which will represent an “efficient upstream cash mechanism, including any potential capital receipts” within the unit.

At a floating interest rate, RIL will be providing a USD 25 billion loan to the O2C subsidiary with a subsidiary holding approximately USD 42 billion in assets (28 per cent of consolidated assets). Although the O2C assets will be moving into a new arm, inside RIL its debt will continue to sit.

The company claimed that ‘O2C market reorganisation encourages the participation of strategic investors and marquee sector-focused investors,’ adding that it would have no effect on the consolidated financials of RIL as well as on foreign and domestic investment-grade credit ratings,’

RIL has also announced its goal to work with the O2C business in order to reduce its carbon footprint along with becoming “net carbon zero” by 2035.

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