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Essar Oil (ESRO.BO)
4Q: In Line; Buoyed By Strong Refining Margins
4Q boosted by strong margins — 4Q GRM was strong at US$8.2/bbl (including sales
tax benefit of cUS$2.9/bbl), in line with expectations. While the sequential jump
reflected strength in refining globally, Essar's margins (ex-sales tax) continued to
under-perform Singapore margins (US$7.4/bbl in 4Q). The quantum of sales tax benefit
has gone up from the regular run-rate of ~US$2.2-2.5/bbl as it is linked to absolute
crude prices, which were up substantially qoq. Essar processed 3.7 MMT of crude in
4Q, maintaining a strong utilization level of ~140%. Overall, Essar processed 1.33
MMT of Mangala crude in Jun’10-Mar’11, which formed ~9% of its crude slate.
Expansion project to be completed by Sep/Oct'11 vs. Jun’11 earlier — Essar has
indicated that its expansion project is largely on track with most units set to achieve
mechanical completion by 2Q/3QCY11. The company intends to take a ~35-day
shutdown in Sep/Oct’11 to tie-in the new units. The refinery has seen a delay from the
earlier completion timeline of Jun’11; however, the increase in complexity and capacity
will be a key driver of earnings going forward.
Updates on the Raniganj CBM project — Essar is currently producing c35,000 scmd
of gas from the field and will commence commercial production once it receives
environmental approvals (likely after the state elections). The company is targeting
production of ~0.63 mmscmd by 4QFY12 and plateau production of 3.5 mmscmd by
4QFY14. Besides, the Gov't has approved a gas sale price of US$5.25/mmbtu (plus an
additional US$1/mmbtu as pipeline charge), which as per mgmt is not a price-cap.
Essar has also completed the pipeline from its field to Durgapur. On its Rajmahal CBM
field, the company is awaiting regulatory approvals to start exploration work. However,
there is still no clarity on the execution of the Ratna PSC.
Successful project execution a potential trigger — With Essar currently executing
two key projects – refinery expansion and CBM gas production – we believe that the
timely implementation of these will be key to stock performance. Maintain Hold
Essar Oil
Company description
Essar Oil (EOL) is a majority-owned subsidiary of Essar Energy Plc (through direct
holding of equity shares and GDS), which in turn is owned by Essar Global Limited.
Besides the 10.5 MMTPA refinery complex at Vadinar, EOL's assets include
developmental rights in proven exploration blocks in India and abroad. Essar Oil
also has a marketing network of 1,376 oil retail stations across India with plans to
increase this network. EOL is expanding its current refinery at Vadinar to 18 MMTPA
from the existing 10.5 MMTPA (operating post-debottlenecking at a run-rate of ~14
MMTPA); the expanded capacity is likely to be commissioned in FY12.
Investment strategy
We rate EOL Hold/Medium Risk with a target price of Rs161. The expansions and
associated increase in complexity will improve the product slate (Euro IV fuels to
comprise 39% of product slate post-expansion) and enhance crude diet (by
processing more heavy, sour, and acidic crudes). Full-fledged recovery of the
refining business is contingent on return of demand growth and capacity
rationalization. Timing of Phase I (ahead of new capacities in the Middle East) and
increase in complexity provides some cushion. However, limited upside, coupled
with project risks, is the key reason for our Hold rating.
Valuation
Our SOTP-based target price of Rs161 for EOL comprises: i) existing refinery (post-
expansion to 18 MMTPA) valued at Rs76/share based on 6.5x FY12E EV/EBITDA
and discounted back to Mar-11E; ii) value of E&P (Raniganj, Rajmahal & Ratna,
Rajmahal 25% risk-weighted) at Rs73/share; and iii) value of tax benefits (IT & sales
tax) at Rs13/share. Our target price is based on GRMs of US$10.0 in FY13E (incl.
sales tax benefits) after completion of the expansion project.
Risks
We rate Essar Oil Medium Risk, as diversified earnings from both refining and E&P
partly mitigate impacts of the global slowdown. Key downside risks to our target
price include: 1) Execution risks for refinery expansion projects, especially in the
light of significant delays in commissioning the existing refinery, 2) Refining margins
are immensely volatile owing to dependence on product demand and global
economic conditions; this exposes EOL's margins to global refining cycles, 3)
Government policy which could include private refiners within the subsidy-sharing
regime, 4) the Gujarat government is contesting EOL's sales tax benefit and the
matter is sub-judice in the Supreme Court, and 5) Execution of the PSC for the
Ratna & R-Series block has already faced considerable delay, further delays could
increase risks; besides there might be a risk to the assets which are in the process
of being transferred from EEPL, a group company, to EOL. Upside risks to our
target include: 1) Significant improvement in the global refining environment and
uptick in distillate demand, 2) Positive outcome of the sales tax-deferment case and
signing the Ratna PSC with the Gov't, and 3) Timely and cost-efficient
commissioning of the expanded capacity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Essar Oil (ESRO.BO)
4Q: In Line; Buoyed By Strong Refining Margins
4Q boosted by strong margins — 4Q GRM was strong at US$8.2/bbl (including sales
tax benefit of cUS$2.9/bbl), in line with expectations. While the sequential jump
reflected strength in refining globally, Essar's margins (ex-sales tax) continued to
under-perform Singapore margins (US$7.4/bbl in 4Q). The quantum of sales tax benefit
has gone up from the regular run-rate of ~US$2.2-2.5/bbl as it is linked to absolute
crude prices, which were up substantially qoq. Essar processed 3.7 MMT of crude in
4Q, maintaining a strong utilization level of ~140%. Overall, Essar processed 1.33
MMT of Mangala crude in Jun’10-Mar’11, which formed ~9% of its crude slate.
Expansion project to be completed by Sep/Oct'11 vs. Jun’11 earlier — Essar has
indicated that its expansion project is largely on track with most units set to achieve
mechanical completion by 2Q/3QCY11. The company intends to take a ~35-day
shutdown in Sep/Oct’11 to tie-in the new units. The refinery has seen a delay from the
earlier completion timeline of Jun’11; however, the increase in complexity and capacity
will be a key driver of earnings going forward.
Updates on the Raniganj CBM project — Essar is currently producing c35,000 scmd
of gas from the field and will commence commercial production once it receives
environmental approvals (likely after the state elections). The company is targeting
production of ~0.63 mmscmd by 4QFY12 and plateau production of 3.5 mmscmd by
4QFY14. Besides, the Gov't has approved a gas sale price of US$5.25/mmbtu (plus an
additional US$1/mmbtu as pipeline charge), which as per mgmt is not a price-cap.
Essar has also completed the pipeline from its field to Durgapur. On its Rajmahal CBM
field, the company is awaiting regulatory approvals to start exploration work. However,
there is still no clarity on the execution of the Ratna PSC.
Successful project execution a potential trigger — With Essar currently executing
two key projects – refinery expansion and CBM gas production – we believe that the
timely implementation of these will be key to stock performance. Maintain Hold
Essar Oil
Company description
Essar Oil (EOL) is a majority-owned subsidiary of Essar Energy Plc (through direct
holding of equity shares and GDS), which in turn is owned by Essar Global Limited.
Besides the 10.5 MMTPA refinery complex at Vadinar, EOL's assets include
developmental rights in proven exploration blocks in India and abroad. Essar Oil
also has a marketing network of 1,376 oil retail stations across India with plans to
increase this network. EOL is expanding its current refinery at Vadinar to 18 MMTPA
from the existing 10.5 MMTPA (operating post-debottlenecking at a run-rate of ~14
MMTPA); the expanded capacity is likely to be commissioned in FY12.
Investment strategy
We rate EOL Hold/Medium Risk with a target price of Rs161. The expansions and
associated increase in complexity will improve the product slate (Euro IV fuels to
comprise 39% of product slate post-expansion) and enhance crude diet (by
processing more heavy, sour, and acidic crudes). Full-fledged recovery of the
refining business is contingent on return of demand growth and capacity
rationalization. Timing of Phase I (ahead of new capacities in the Middle East) and
increase in complexity provides some cushion. However, limited upside, coupled
with project risks, is the key reason for our Hold rating.
Valuation
Our SOTP-based target price of Rs161 for EOL comprises: i) existing refinery (post-
expansion to 18 MMTPA) valued at Rs76/share based on 6.5x FY12E EV/EBITDA
and discounted back to Mar-11E; ii) value of E&P (Raniganj, Rajmahal & Ratna,
Rajmahal 25% risk-weighted) at Rs73/share; and iii) value of tax benefits (IT & sales
tax) at Rs13/share. Our target price is based on GRMs of US$10.0 in FY13E (incl.
sales tax benefits) after completion of the expansion project.
Risks
We rate Essar Oil Medium Risk, as diversified earnings from both refining and E&P
partly mitigate impacts of the global slowdown. Key downside risks to our target
price include: 1) Execution risks for refinery expansion projects, especially in the
light of significant delays in commissioning the existing refinery, 2) Refining margins
are immensely volatile owing to dependence on product demand and global
economic conditions; this exposes EOL's margins to global refining cycles, 3)
Government policy which could include private refiners within the subsidy-sharing
regime, 4) the Gujarat government is contesting EOL's sales tax benefit and the
matter is sub-judice in the Supreme Court, and 5) Execution of the PSC for the
Ratna & R-Series block has already faced considerable delay, further delays could
increase risks; besides there might be a risk to the assets which are in the process
of being transferred from EEPL, a group company, to EOL. Upside risks to our
target include: 1) Significant improvement in the global refining environment and
uptick in distillate demand, 2) Positive outcome of the sales tax-deferment case and
signing the Ratna PSC with the Gov't, and 3) Timely and cost-efficient
commissioning of the expanded capacity.
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