Working through a set of smaller firms will make it easier for RIL to raise resources.
Reliance Industries plans to transfer 80 per cent of its participatory interest in the Krishna Godavari (KG)-D6 oil block, to four wholly –owned subsidiaries. It’s not a bad move as it will help RIL to raise resources — whether equity or debt — by roping in financial or strategic investors. After all, oil exploration and extraction is an expensive business.
Operating through a set of smaller companies could turn out to be easier than through one big entity like RIL, in which a dilution would not be welcome. Also, more value creation is possible: for instance, RIL could swap stake in one of the subsidiaries for a stake of equivalent value in an oilfield overseas, without any cash changing hands.
Minority shareholders should not be worried because any dilution in stake in any of the subsidiaries in favour of a partner should only help unlock value. Earlier this month, the Rs 1.3 lakh crore RIL is understood to have made eight more discoveries in the KG-D6 basin, in which Niko holds 10 per cent stake and will continue to do so even after the restructuring. The initial output is estimated at 40 million standard cubic meters per day, and the output should double in one year. The company is believed to have already invested $3.28 billion.
Meanwhile, Singapore gross refining margins have come off further to just under $3 per barrel and that could affect margins for RIL too, say analysts. Also, fresh refining capacities are coming on stream – the expected addition in 2008 is about 1.4 million barrels per day and this could go up to 1.7 million barrels per day in 2009.
Besides, the chemicals business may see its margins under pressure with global demand weakening and capacities coming in, point out industry watchers.
At the current price of Rs 2180, the stock, which was down 2.30 per cent on Tuesday, trades at around 22 times estimated FY09 earnings.