Billionaire Mukesh Ambani's Reliance Industries announced the contours of spinning-off its oil refining, fuel marketing and petrochemical (oil-to-chemical) business into an independent unit with a USD 25 billion loan from the parent, as it looks to unlock value by settling stakes to global investors like Saudi Aramco.
The carving out of Reliance O2C Limited (O2C) will enable the focused pursuit of opportunities across the oil-to-chemicals value chain, improve efficiencies through self-sustaining capital structure and a dedicated management team, and attract dedicated pools of investor capital, according to a company presentation filed with the stock exchanges.
The transfer of twin refineries at Jamnagar in Gujarat, petrochemical sites in multiple states, and a 51 per cent stake in the fuel retailing business to O2C will be on a 'slump sale basis', subject to requisite approvals that are expected to come in by September.
However, upstream oil and gas producing fields such as KG-D6 and textiles business will not form part of the new unit, where it aims to maintain a significant majority stake.
The consideration for the transfer will be in the form of long-term interest-bearing debt of USD 25 billion to be issued by O2C to Reliance Industries Ltd (RIL). RIL's external debt is proposed to remain with RIL only.
Once completed, RIL -- the company founded by Dhirubhai Ambani in the late 1960s -- will house only the upstream oil and gas exploration and production business, financial services, group treasury and legacy textile businesses, and act as a holding company of the group.
The retail business is held in Reliance Retail Ventures Ltd and telecom and digital ventures are nested in Jio Platforms Ltd.
Long-dated loans issued by O2C to RIL, as part of the reorganisation, will provide an efficient mechanism to upstream cash generated from O2C to RIL, the presentation said.
RIL has been in ongoing discussions with Saudi Arabian Oil Company (Saudi Aramco) to sell a minority 20 per cent stake in its O2C businesses, which, if successful, should lead to further deleveraging of the company.
While Moody's Investors Service said the separation of O2C business "will facilitate a potential stake sale to Aramco, possibly enabling a further reduction in RIL's net debt," Fitch Ratings said the reorganisation "will have a neutral impact on RIL's credit metrics and rating." The wholly-owned O2C unit's assets will be funded by the interest-bearing loan, which will be an "efficient mechanism to upstream cash, including any potential capital receipts," in the unit, RIL said.
RIL will provide a loan of USD 25 billion to the O2C subsidiary at floating interest rate with the subsidiary having about USD 42 billion of assets (28 per cent of consolidated assets). Even though the O2C assets will move into a new arm, its debt will continue to sit inside RIL.
In August 2019, RIL had agreed to upstream Rs 1.08 lakh crore of Jio's debt to make its telecom venture debt-free, ahead of inducting strategic and financial investors like Facebook, Google and KKR.
RIL sold a 33 per cent stake in the digital services to global investors including Facebook and Google for Rs 1.52 lakh crore and 10 per cent in its retail subsidiary to global investors for Rs 47,265 crore.
Also, aiding the net debt-free status was proceeds from RIL's Rs 51,124 crore rights issue.
RIL holds 85.1 per cent of Reliance Retail and 67.3 per cent of Jio Platforms.
As of December 2020, RIL's gross debt stood at Rs 2.57 lakh crore.
RIL is also working on a structure wherein the interest cost that the O2C arm will bear for buying the assets will be equal to the interest cost that parent RIL bears for its outstanding loans.
"Reorganisation of O2C business facilitates participation by strategic investors and marquee sector-focused investors," the firm said, adding it would have no impact on RIL's consolidated financials as well as investment-grade international and domestic credit ratings.
RIL also announced its aim to work with the O2C business to reduce its carbon footprint and become "net carbon zero" by 2035.
Its vision includes investing in developing renewable energy systems to meet energy demand and to speed up the transition from traditional carbon-based fuels to hydrogen.
Reliance O2C Limited houses oil refining and petrochemical plants and manufacturing assets, bulk and wholesale fuel marketing, and RIL's 51 per cent interest in retail fuel joint venture with BP of the UK.
The O2C unit also houses the firm's Singapore and the UK-based oil trading subsidiaries and marketing subsidiary, Reliance Industries Uruguay Petroquimica SA.
It also houses Reliance Ethane Pipeline Limited that operates a pipeline between Dahej in Gujarat and Nagothane in Maharashtra as well as a 74.9 per cent stake that Reliance holds in the joint venture with Sibur.
Its very large ethane carriers, gas pipelines such as one that transports coal-bed methane from its CBM blocks, overseas oil and gas asset holding company Reliance Industries (Middle East) DMCC, and domestic exploration and production assets would not form part of the O2C unit.
Also, RIL's textiles business as operated out of the Naroda site, Baroda township and land, including cricket stadium, Jamnagar power assets, and Sikka Ports and Terminals Limited would also not be part of the O2C unit.
RIL owns and operates twin oil refineries at Jamnagar in Gujarat, with a combined capacity of 68.2 million tonnes per annum.
It is also the country's largest petrochemical manufacturer with units at Jamnagar, Dahej, Hazira, Nagothane, Vadodara, Patalganga, Silvassa, Barabanki, and Hoshiarpur.
The company holds a 66.6 per cent stake in the KG-D6 block where it is investing about USD 5 billion in developing a second set of gas discoveries along with BP.
It also has 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.