Taking strategic investors on board for the new-generation energy business will keep the net debt levels under control. According to Morgan Stanley, RIL will be investing $ 50-60 billion on the capital outlays, out of which $ 10-15 billion is like…
A plan to carve out the refining and petrochemicals business (oil to chemicals or O2C) as a subsidiary may help Reliance Industries (RIL) in attracting strategic and financial investors crucial for its foray into the alternative energy vertical. The company aims to make its operations net carbon zero by 2035.
Under the plan, RIL on a standalone basis will transfer $ 40 billion (approximately Rs 2.9 lakh crore) of long-term assets and $ 2 billion (Rs 14,500 crore) of net working capital to the O2C entity for the consideration of a $ 25 billion (Rs 1.8 lakh crore) floating rate loan linked to one-year SBI MCLR rate and $ 12 billion (Rs 87,000 crore) of equity. The arrangement will be tax neutral and will not impact the company’s consolidated cash flow, thus keeping its credit rating intact.
The loan will be gradually repaid as and when proceeds are received from strategic investors for the O2C venture. The format is quite similar to the Jio Platforms structure wherein the proceeds from the stake sale were used to deleverage the consolidated balance sheet. Using the implied valuation of $ 75 billion for the O2C business based on the Saudi Aramco deal announced in August 2019, its equity value works out to be $ 45 billion after excluding $ 30 billion debt. It means the proposed 20% stake sale to Saudi Aramco would result in the cash flow of $ 9 billion.
At the consolidated level, RIL had a gross debt of Rs 2.6 lakh crore ($ 35.2 billion) at the end of December 2020 compared with Rs 3.4 lakh crore ($ 44 bn) in FY20. Its cash and equivalents increased to Rs 2.2 lakh crore ($30.2 billion) from Rs 1.8 lakh crore ($ 24.7 billion) by similar comparison.
The next investment cycle of the O2C business will be to accelerate new energy and new material as the global energy demand shifts to alternative fuels from fossils. The focus of the O2C business will be on recycling, reducing carbon footprint, increasing efforts to convert crude and feedstocks to polymers and adopting new generation technology to capture and use carbon dioxide.
Taking strategic investors on board for the new-generation energy business will keep the net debt levels under control. According to Morgan Stanley, RIL will be investing $ 50-60 billion on the capital outlays, out of which $ 10-15 billion is likely to be spent on the new energy business. The funding from strategic partners to new energy businesses may help to maintain free cash flow despite undergoing a large investment cycle.
https://m.economictimes.com/industry/energy/oil-gas/why-o2c-restructuring-is-crucial-for-rils-alternative-energy-venture/amp_articleshow/81172594.cms
