By taking a $25 billion loan from the parent company Reliance Industries Limited (RIL) is on its way to create a separate new subsidiary for its oil-to-chemical (O2C) chemicals. They are aiming towards a possible stake sale and a step towards unlocking value by focusing on a clean energy concept thereby embarking on the next level of an investment cycle. Having received approvals from SEBI and stock exchanges in place, RIL has to seek the blessing of the creditors and shareholders by the first quarter of the next financial year.
The O2C scheme is to become effective from Jan 1, 2021. RIL is proposing to transfer all of its refining, petrochemicals, and marketing assets to the O2C entity that would include the 51:49 fuel marketing joint venture with BP 74.9% elastomer JV with Sibur, Recron/RP Chemicals Malaysia, trading subsides, ethane pipeline, and related assets. The rationale working behind the creation of a standalone entity is to let it pursue opportunities through the O2C value chain through a self-sustaining capital structure and a dedicated management team. Acting in that manner, a transfer of $ 40 billion worth of long-term assets, $2 billion of net working capital, and $ 5 billion of non-current liabilities is to be made towards the O2C entity. This would be for a consideration of $25 billion worth long-dated loan and $12 billion of equity from RIL. Since the company wants to maintain its international and domestic credit ratings, there wouldn’t be any changes in management control or dilution of earnings, or any restriction of cash flow. But the O2C demerger is not expected to bring on any changes on consolidated numbers but would improve the outlook on stake sales in O2C. The loan of $25 billion would help in making potential stake sales more tax efficient. If Saudi Aramco is to be sold, according to Sweta Patodia of Moody’s investors, further reduction in RIL’s net debt would be encouraged.
Earlier, RIL had considered a 20% stake in Saudi Aramco at a valuation of $25 billion and would result in a receipt of $15 billion. Analysts believe this de-merger would be a big step towards monetization and acceleration of its new energy as well as material plan into batteries, hydrogen, renewables, and carbon capture. This venturing into green energy is to be positively welcomed by investors.