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Highest ever throughput at 3.73 mmt; GRM increases to USD 7.21/bbl
Essar Oil (ESOIL) processed 3.73 mmt of crude during Q3FY11 (+6.3% Y-o-Y
and +1.1% Q-o-Q), with the cumulative throughput at 11.1 mmt for April-
December 2010. Capacity utilisation for the quarter stood at 105%. Refining
margins were at USD 7.21/bbl, up 11.1% Q-o-Q and 226.2% Y-o-Y. Sales tax
benefits contributed USD 2.5/bbl to the company’s overall GRMs.
EBITDA and PAT marginally below our estimates
ESOIL’s EBITDA, at INR 7.3 bn (up 18.8% Q-o-Q and 229% Y-o-Y), was lower
than our estimate (INR 7.9 bn) due to below expected GRM and higher operating
costs (INR 3.5 bn against estimate of INR 2.5 bn). An arbitration award (INR 505
mn) received in favour of the company was taken on books during the quarter,
leading to a jump in other income, to INR 1.0 bn (INR 0.2 bn for Q2FY11).
Overall, PAT was marginally below our estimates at INR 2.7 bn (+110% Q-o-Q).
Refinery expansion by June 2011; increased offtake of Mangala crude
The company’s refinery expansion (to 18 mmtpa) is on track and is ~78%
complete. Mechanical commissioning is expected in June 2011; ESOIL has
announced a 35-day shutdown during May-June 2011 for commissioning it.
During Q3FY11, the company also announced its plans to further the refinery’s
capacity to 20 mmtpa by September 2012 at an estimated capex of INR 17 bn.
In another positive development, offtake of Mangala crude in Q3FY11 increased
to 45,000 bpd (up from 30,000 bpd in Q2FY11), accounting for 15% of the
refinery’s crude slate.
Outlook and valuations: Positive on refining margins; maintain ‘BUY’
While Q3FY11 results were in line with estimates, we have cut our FY11 and
FY12 estimates to incorporate higher operating costs and slower scale-up of
expanded refining throughput. We are also changing our valuation metric to only
account for the Refinery-1 (earlier, we had incorporated upsides of INR 34/share
from Refinery-2). Our March 2012 SOTP fair value now stands at INR 153/share.
ESOIL’s GRMs are likely to improve, going forward, on better outlook for regional
refining margins and increasing complexity from the expansion project. With
multiple triggers ahead, including monetisation of the Raniganj gas block
(expected in FY12), and clarity emerging on Ratna E&P block, we remain positive
on re-rating of ESOIL. At CMP of INR 128, the stock trades at 12.1x FY12E and
10.1x FY13E EPS. We maintain ‘BUY/Sector Outperformer’ on the stock.
E&P highlights
• ESOIL has steadily increased gas production in the Raniganj block to 30,000 scmd
(up from 18,000 scmd in Q2FY11) with sales of some amount of gas started to the
local industry in the area. Pipeline connectivity to bigger customers has been
completed and the company expects to commence commercial sales shortly.
• The company has drilled 35 out of the 143 wells planned in the first phase of
Raniganj block development (certified contingent resource of 0.2 tcf and best
estimate prospective resource of 0.792 tcf). Financial closure has also been achieved
for the first phase.
• The gas pipeline from Raniganj-Durgapur (48 km) is under trial stage of construction
and is expected to be commissioned in Q4FY11.
• The company has started oil production in small quantities from its Mehsana block
and preparations are underway to start work on the Nigerian Block (OPL 226).
• Total reserves/resources maintained at 2.1 bn boe with 2P/2C resources of 150 mn
boe. It may be noted that unrisked in-place resources stood at 1 bn boe as on
September 30, 2010.
Refining, marketing and other highlights
• Offtake of Mangala crude in Q3FY11 stood at 45,000 bpd (up from 30,000 bpd in
Q2FY11), accounting for 15% of the refinery’s crude slate.
• During Q3FY11, ESOIL booked USD 2.5/bbl on sales tax deferral. Operating GRMs,
net of sales tax deferral, was USD 4.7/bbl.
• The company’s mix of domestic and export sales stood at 63% and 37%,
respectively.
• ESOIL has over 1,385 retail outlets operational now with 240 new outlets under
various stages of construction. The company is on target with its plans to have 1,700
outlets by March 2011.
Changing estimates to incorporate higher operating costs and lower throughput
• We are reducing our FY11E and FY12E EPS to incorporate lower throughput and
higher operating costs.
• We had earlier assumed operating costs at USD 2.0/bbl, but now believe that the
same will be ~USD 2.5/bbl due to higher complexity and impact of higher commodity
costs.
• We had earlier assumed FY12E throughput at 14.9 mmt, but now estimate FY12E
throughput at 14.4 mmt to incorporate minor delays in the refinery start-up. Our
FY12E assumptions estimate capacity utilisation at 80%.
Company Description
ESOIL is one of the major arms of the Essar Group, and currently has operations
primarily in refining and marketing of petro products. Historically, the company had a
business of oil exploration rigs, which it has exited. ESOIL aims to be a vertically
integrated entity, and has therefore embarked on acquisition of upstream assets.
However, its core business remains refinery-centric, for which the company has
ambitious expansion plans.
ESOIL has a 10.5 MMTPA, 6.1 NCI (Nelson Complexity Index) refinery at Vadinar, near
Jamnagar in Gujarat. The refinery started trial production in mid-FY08, and FY09 was its
first full year of operations. ESOIL has interests in the upstream sector as well, and aims
to transform into a true integrated oil and gas entity through forays into the E&P
segment. It has interests in blocks in India (both E&P and CBM), and some assets lying
with other group companies of ESOIL are pending approval for transfer to ESOIL.
Investment Theme
• Mega expansion in refining to complete as industry recovers from overcapacity
• Twin fiscal benefits increase attractiveness of returns for investors
• Expanded high-complexity refinery to outperform peers on multiple fronts
• Robust demand despite global economic slowdown provides comfort on offtake
• Resilient marketing model to benefit further from auto fuel pricing deregulation
• Exploratory upsides and CBM monetisation to add value
Key Risks
• Project execution risk for refinery 2
• Recessionary demand attenuation leading to overcapacity and muted GRMs
• Rupee appreciation may harm refining realisations
• Marketing segment’s growth may be constrained due to regulatory disparity
• Signing of PSC for Ratna E&P block
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