Essar Oil - Refining margins weaker; the much awaited upgrade may finally be around the corne:: Credit Suisse

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Essar Oil ------------------------------------------------------------------------ Maintain OUTPERFORM
Refining margins weaker; the much awaited upgrade may finally be around the corne


ESOIL reported 1Q FY12 EPS of Rs3.4, up 46% QoQ and 74%
ahead of our estimates. Adjusted for the one-time prior period
MAT credit of Rs1.7bn, PAT would have been in line.
● ESOIL reported ‘clean price’ GRM of $4.2/bbl, down $1.1 QoQ;
contrary to benchmarks. At the analyst meet, ESOIL indicated
‘book GRM’ (inclusive of inventory, hedging and other gains) of
c.$10/bbl was up $0.5/bbl QoQ, still behind benchmarks. While we
await details from the company, we suspect a worsening slate
(higher FO output) could have contributed to the miss.
● Higher inventory gains, other income (Rs870 mn on payables to
Iran), hedging gains (Rs800 mn) and lower interest costs (on
working capital) have helped earnings.
● After several deferrals, ESOIL now hopes to affect a 35-day
shutdown at the Vadinar refinery beginning 18 Sept to integrate the
upgrades; though the delayed coker is further deferred into Dec.
ESOIL estimates the upgrade can add $4-5/bbl to margins. ESOIL
trades at c.6x on FY13E. The upgrade can be a significant catalyst
ESOIL declares 1Q FY12 EPS of Rs3.4
ESOIL reported 1Q FY12 EPS of Rs3.43, up 46% QoQ and 74%
ahead of our estimates. ESOIL’s clean price GRM (ex sales tax) fell
$1.1/bbl, contrary to benchmarks. Sales tax benefits of $3.2/bbl
increased $0.3/bbl QoQ. ESOIL has booked MAT credit of Rs2.6 bn
including Rs1.7 bn for prior periods. Adjusted for this, PAT would have
been in line, despite the headline miss in GRMs. Higher inventory
gains, other income (Rs870 mn on payables to Iran), hedging gains
(Rs800 mn) and lower interest costs (on working capital) helped.
At the analyst meet, ESOIL estimated ‘book GRM’ (similar to that
reported by other Indian refiners) at c.$10/bbl, up $0.5/bbl QoQ; this
growth is still lower than regional benchmarks. While we await details
from the company, we suspect a worsening slate (Heavy output
increased 2% QoQ) could have contributed to the miss. Higher crude
prices and potentially larger sales within the state of Gujarat could
have contributed to the increased sales tax benefits.


Refinery phase-I upgrade by year end
ESOIL hopes to affect a 35-day shutdown from 18 Sept to finally
integrate the new units (as part of the upgrade) and to revamp the
CDU, FCCU and SRU. The delayed coker (needed to eliminate FO
output) it seems will be further delayed and is expected to complete
by 4Q CY11; though the company insists it will not have to take any
more shutdowns to bring that unit online. While the project intends to
increase capacity from 14 MTPA to 18 MTPA, the upgraded units may
operate at a lower run rate for some time, we understand.
ESOIL is unsure of any progress on the Ratna E&P block, but is
hopeful of near-term clearances for the Raniganj CBM.
On a simulation of the upgrades, ESOIL management believes GRMs
can improve $4-5/bbl from the current levels (we have a $4/bbl
increase in FY13E over FY12E), which should materially improve EPS
and cash flow for the company. On our numbers, ESOIL trades at c.6x
FY13E EPS. The upgrade can be a significant catalyst. We maintain
OUTPERFORM.