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Essar Oil (ESRO.BO; Rs126.05; 2M)
Takeaways from Mumbai – Essar Oil presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
Refinery expansion project on track – Essar’s refinery expansion project (14 to
18 MMTPA) is expected to be complete by 2Q/3QFY12E, with a shutdown of the
current units expected in Sep-end for maintenance and to tie-in the new units.
The mgmt expects this expansion cum upgrade project to add ~US$4-5/bbl to its
GRMs on account: of 1) greater use of heavier and cheaper crudes (complexity
to increase from 6.1 to 11.8), and 2) an enhanced product slate maximizing the
production of high-value products, such as diesel and gasoline.
Refinery currently using LNG – With KG gas production not ramping up and
the Gov’t allocating domestic gas to priority customers (power, fertilizer, city gas),
Essar has been using imported LNG as a fuel in its refinery. While imported LNG
at US$11- 12/mmbtu is significantly more expensive than domestic gas, the
company stated that it is still economical vs. alternatives such as fuel oil.
Raniganj CBM - Environmental clearances are expected shortly - Essar is
currently producing ~35,000 scmd of gas from its Raniganj CBM field, which is
being sold to industrial consumers. Mgmt expects environmental clearance for
the commencement of commercial production from the field to come in soon,
now that the West Bengal elections are over.
Strong refining outlook – Essar expects refining margins to remain healthy, on
the back of strong diesel and gasoline demand. While margins in the last few
months have been boosted by the Japan crisis, going forward mgmt expects
strong product demand to keep margins firm.
Expansion of fuel retail business contingent on Gov’t policy – Essar
currently has ~1,700 retail outlets, of which 1,381 are operational. With domestic
diesel prices still significantly below international prices, the company expects its
retail volumes to pick up only if 1) crude prices soften from current levels and/or
2) fuel prices are hiked or deregulated.
Timely project execution remains key – Essar is currently executing two key
projects: refinery expansion and the Raniganj CBM project. The refinery
expansion project currently remains on track, and the company expects the
environmental clearance for commercial production of gas from the Raniganj field
to come in soon. We believe that 1) trends in regional refining margins and 2)
timely commissioning of new projects would be key determinants of earnings and
valuations going forward. Maintain Hold (2M).
Essar Oil
(ESRO.BO; Rs126.05; 2M)
Valuation
Our SOTP-based target price of Rs161 for EOL comprises: i) existing refinery (postexpansion
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; Rs126.05; 2M)
Takeaways from Mumbai – Essar Oil presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
Refinery expansion project on track – Essar’s refinery expansion project (14 to
18 MMTPA) is expected to be complete by 2Q/3QFY12E, with a shutdown of the
current units expected in Sep-end for maintenance and to tie-in the new units.
The mgmt expects this expansion cum upgrade project to add ~US$4-5/bbl to its
GRMs on account: of 1) greater use of heavier and cheaper crudes (complexity
to increase from 6.1 to 11.8), and 2) an enhanced product slate maximizing the
production of high-value products, such as diesel and gasoline.
Refinery currently using LNG – With KG gas production not ramping up and
the Gov’t allocating domestic gas to priority customers (power, fertilizer, city gas),
Essar has been using imported LNG as a fuel in its refinery. While imported LNG
at US$11- 12/mmbtu is significantly more expensive than domestic gas, the
company stated that it is still economical vs. alternatives such as fuel oil.
Raniganj CBM - Environmental clearances are expected shortly - Essar is
currently producing ~35,000 scmd of gas from its Raniganj CBM field, which is
being sold to industrial consumers. Mgmt expects environmental clearance for
the commencement of commercial production from the field to come in soon,
now that the West Bengal elections are over.
Strong refining outlook – Essar expects refining margins to remain healthy, on
the back of strong diesel and gasoline demand. While margins in the last few
months have been boosted by the Japan crisis, going forward mgmt expects
strong product demand to keep margins firm.
Expansion of fuel retail business contingent on Gov’t policy – Essar
currently has ~1,700 retail outlets, of which 1,381 are operational. With domestic
diesel prices still significantly below international prices, the company expects its
retail volumes to pick up only if 1) crude prices soften from current levels and/or
2) fuel prices are hiked or deregulated.
Timely project execution remains key – Essar is currently executing two key
projects: refinery expansion and the Raniganj CBM project. The refinery
expansion project currently remains on track, and the company expects the
environmental clearance for commercial production of gas from the Raniganj field
to come in soon. We believe that 1) trends in regional refining margins and 2)
timely commissioning of new projects would be key determinants of earnings and
valuations going forward. Maintain Hold (2M).
Essar Oil
(ESRO.BO; Rs126.05; 2M)
Valuation
Our SOTP-based target price of Rs161 for EOL comprises: i) existing refinery (postexpansion
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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