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UBS Investment Research
Essar Oil
Key takeaways from refinery visit
�� Refinery field trip with senior mangement
We visited the Essar Oil refinery and other group facilities during a two-day field
trip. The key units for the phase 1 refinery expansion to 18 mmtpa have either been
hooked up or are available on site or on the nearby port jetty. We believe it could
take another 5-6 months to install the equipment and instrumentation; the company
gave a similar estimate for completion of the equipment installation.
�� Expect upgrade and expansion to 18 mmtpa by September 2011
Given the instrumentation and commissioning time, the positives from the upgrade
are likely to only be reflected by 4QFY12. Hence, the slight delay in the upgrade
does not change our numbers as we factored it only into our FY13 estimates. The
technology and engineering has been obtained from reputed companies such as
ABB, Axens, UOP, EIL and Technip, though engineering is split between group
companies and vendors.
�� E&P business: Raniganj CBM has some visibility; Ratna PSC awaited
We value the E&P business (in our view, conservatively) at Rs18/share, which
mainly reflects the value of its: 1) Raniganj CBM block and incorporates the risks
associated with offtake; and 2) Ratna field, incorporating a discount given the
delay in signing of the PSC. Value from Rajmahal, Mehsana, and Nigeria remains
an upside possibility once proven.
�� Valuation: sum-of-the-parts based price target of Rs175
We value the stock on a sum-of-the-parts basis: refinery + retail + upstream. We
value core refining at Rs140, retail at Rs17, and the upstream assets at Rs18. All
else being equal, we estimate the retail business has the potential to be valued at
Rs22-25 and upstream at Rs25-30 if the projects come on line on schedule.
We expect refinery upgrade by September 2011
The key units for the phase 1 refinery expansion to 18 mmtpa have either been
hooked up or are available on site or on the nearby port jetty. We believe it
could take another 5-6 months to install the equipment and instrumentation; the
company gave a similar estimate for completion of the equipment installation.
Though the company believes that by September the refinery throughput would
increase to 18 mmtpa, given the time required for instrumentation checks and
commissioning, we expect the positives from higher throughput and higher
complexity to be reflected in the numbers only by 4QFY11.
Vadinar refinery—upgrade and expansion
Essar plans to expand its refinery capacity to 360kbpd (from 280kbpd) and
upgrade its refinery by adding equipment. In our view, the upgraded refinery
will have a high complexity and be among the leading refineries globally.
The phase 1 of refinery upgrade from 14 to 18 mmtpa should add
~US$2.4/bbl to the GRMs taking them from US$5.8/bbl to US$8.2/bbl. This
is excluding the sales tax benefit, which should add another US$1.8/bbl.
Source: Company data, UBS
The coker is to eliminate low-value fuel oils, while the hydrotreater should
improve the quality of fuels so that they can be exported to developed countries
at a premium (low sulphur fuels sell at a premium). Fuel oil is a negative margin
product and the purpose of the upgrade is to eliminate fuel oil production and
increase gasoline/diesel production, which has a higher value add.
The upgrade should also increase the proportion of heavy and sour crude, which
trades at a discount to light crude and provides for arbitrage. In the past, more
complex refineries earned substantially higher gross refining margins due to
their superior product mix and lower cost crude. We expect this arbitrage to start
to narrow as all the refineries that have been commissioned recently have higher
complexity.
Exploration and production business
We (in our view, conservatively) value the upstream business at Rs18. This
mainly reflects the value of the Raniganj field and the Ratna fields. We riskadjust
our valuation for the Raniganj field to 75% to incorporate the uncertainty
associated with the gas offtake. We risk-adjust our NAV estimate for the Ratna
field to 33% to discount the lack of visibility on the signing of the PSC.
CBM blocks typically have low risk of deviation from expected production than
typical gas fields as the amount of recoverable gas in the coal seams can be
reasonably estimated beforehand. The key risk factor we see in the Raniganj
block is offtake. The company is planning to build a 48km pipeline to be able to
supply to the industrial region of Durgapur. It also has a take or pay (and supply
or pay) agreement with Matix fertilisers, a group company that is expected to set
up a plant near the CBM source in the coming years.
Sensitivity analysis
Given our earnings estimates for the next few years are driven by the refining
business, they are sensitive to refining margins. According to our analysis, a
US$ 1/bbl increase in refining margins would increase FY12 EPS estimates by
43% and FY13 EPS estimates by 25%, all else remaining equal.
Valuation: sum-of-the-parts based valuation
We value the stock on a sum-of-the-parts basis: refinery + retail + upstream. We
value core refining at Rs140, retail at Rs17, and upstream assets at Rs18. Our
Rs254bn value estimate for the refining business implies an EV/EBITDA of 6x
FY13E. All else being equal, we estimate retail has the potential to be valued at
Rs22-25 and upstream at Rs25-30 if projects come on line on schedule.
�� Essar Oil
Essar Oil is a part of Essar Holdings Limited, a subsidiary of Essar Global
Limited. It operates a 14mtpa refinery on the west coast of India and plans to
increase refining capacity to 18mtpa by March 2011 and to 36mtpa by March
2013. The company's assets include developmental rights in proven exploration
blocks, and it has over 1,200 retail outlets across India with plans to expand to
3,000 outlets.
�� Statement of Risk
Refining margins and execution of the refinery upgrade are key business risks
for Essar at this stage. Progress on E&P can provide upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Essar Oil
Key takeaways from refinery visit
�� Refinery field trip with senior mangement
We visited the Essar Oil refinery and other group facilities during a two-day field
trip. The key units for the phase 1 refinery expansion to 18 mmtpa have either been
hooked up or are available on site or on the nearby port jetty. We believe it could
take another 5-6 months to install the equipment and instrumentation; the company
gave a similar estimate for completion of the equipment installation.
�� Expect upgrade and expansion to 18 mmtpa by September 2011
Given the instrumentation and commissioning time, the positives from the upgrade
are likely to only be reflected by 4QFY12. Hence, the slight delay in the upgrade
does not change our numbers as we factored it only into our FY13 estimates. The
technology and engineering has been obtained from reputed companies such as
ABB, Axens, UOP, EIL and Technip, though engineering is split between group
companies and vendors.
�� E&P business: Raniganj CBM has some visibility; Ratna PSC awaited
We value the E&P business (in our view, conservatively) at Rs18/share, which
mainly reflects the value of its: 1) Raniganj CBM block and incorporates the risks
associated with offtake; and 2) Ratna field, incorporating a discount given the
delay in signing of the PSC. Value from Rajmahal, Mehsana, and Nigeria remains
an upside possibility once proven.
�� Valuation: sum-of-the-parts based price target of Rs175
We value the stock on a sum-of-the-parts basis: refinery + retail + upstream. We
value core refining at Rs140, retail at Rs17, and the upstream assets at Rs18. All
else being equal, we estimate the retail business has the potential to be valued at
Rs22-25 and upstream at Rs25-30 if the projects come on line on schedule.
We expect refinery upgrade by September 2011
The key units for the phase 1 refinery expansion to 18 mmtpa have either been
hooked up or are available on site or on the nearby port jetty. We believe it
could take another 5-6 months to install the equipment and instrumentation; the
company gave a similar estimate for completion of the equipment installation.
Though the company believes that by September the refinery throughput would
increase to 18 mmtpa, given the time required for instrumentation checks and
commissioning, we expect the positives from higher throughput and higher
complexity to be reflected in the numbers only by 4QFY11.
Vadinar refinery—upgrade and expansion
Essar plans to expand its refinery capacity to 360kbpd (from 280kbpd) and
upgrade its refinery by adding equipment. In our view, the upgraded refinery
will have a high complexity and be among the leading refineries globally.
The phase 1 of refinery upgrade from 14 to 18 mmtpa should add
~US$2.4/bbl to the GRMs taking them from US$5.8/bbl to US$8.2/bbl. This
is excluding the sales tax benefit, which should add another US$1.8/bbl.
Source: Company data, UBS
The coker is to eliminate low-value fuel oils, while the hydrotreater should
improve the quality of fuels so that they can be exported to developed countries
at a premium (low sulphur fuels sell at a premium). Fuel oil is a negative margin
product and the purpose of the upgrade is to eliminate fuel oil production and
increase gasoline/diesel production, which has a higher value add.
The upgrade should also increase the proportion of heavy and sour crude, which
trades at a discount to light crude and provides for arbitrage. In the past, more
complex refineries earned substantially higher gross refining margins due to
their superior product mix and lower cost crude. We expect this arbitrage to start
to narrow as all the refineries that have been commissioned recently have higher
complexity.
Exploration and production business
We (in our view, conservatively) value the upstream business at Rs18. This
mainly reflects the value of the Raniganj field and the Ratna fields. We riskadjust
our valuation for the Raniganj field to 75% to incorporate the uncertainty
associated with the gas offtake. We risk-adjust our NAV estimate for the Ratna
field to 33% to discount the lack of visibility on the signing of the PSC.
CBM blocks typically have low risk of deviation from expected production than
typical gas fields as the amount of recoverable gas in the coal seams can be
reasonably estimated beforehand. The key risk factor we see in the Raniganj
block is offtake. The company is planning to build a 48km pipeline to be able to
supply to the industrial region of Durgapur. It also has a take or pay (and supply
or pay) agreement with Matix fertilisers, a group company that is expected to set
up a plant near the CBM source in the coming years.
Sensitivity analysis
Given our earnings estimates for the next few years are driven by the refining
business, they are sensitive to refining margins. According to our analysis, a
US$ 1/bbl increase in refining margins would increase FY12 EPS estimates by
43% and FY13 EPS estimates by 25%, all else remaining equal.
Valuation: sum-of-the-parts based valuation
We value the stock on a sum-of-the-parts basis: refinery + retail + upstream. We
value core refining at Rs140, retail at Rs17, and upstream assets at Rs18. Our
Rs254bn value estimate for the refining business implies an EV/EBITDA of 6x
FY13E. All else being equal, we estimate retail has the potential to be valued at
Rs22-25 and upstream at Rs25-30 if projects come on line on schedule.
�� Essar Oil
Essar Oil is a part of Essar Holdings Limited, a subsidiary of Essar Global
Limited. It operates a 14mtpa refinery on the west coast of India and plans to
increase refining capacity to 18mtpa by March 2011 and to 36mtpa by March
2013. The company's assets include developmental rights in proven exploration
blocks, and it has over 1,200 retail outlets across India with plans to expand to
3,000 outlets.
�� Statement of Risk
Refining margins and execution of the refinery upgrade are key business risks
for Essar at this stage. Progress on E&P can provide upside.
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