Essar Oil rallies 10% on $8 billion worth stake deal with Roseneft

MUMBAI: Essar Oil ended the day 14.35points or 9.98 per cent up at 158.20 after it rallied almost 10 per cent and breached ther upper circuit in intraday trade today, on reports that Essar Oil will this week sign a final term sheet with Russia's OAO Rosneft to import 10 million tonnes of crude oil a year for 10 years after an initial deal was signed in December. In parallel, the two sides are negotiating for Rosneft to buy a large stake in Essar Oil, according to people familiar with the matter.

Rosneft, the world's largest publicly traded oil company, signed an MoU for a multi-year crude supply deal with Essar Oil during Russian President Vladimir Putin's visit to India last December. This was to secure and diversify supply lines for Essar's 4,00,000 barrels per day (bpd) Vadinar refinery. At the same time, it gave Rosneft and Russia a toehold in Asia's third-largest economy. Rosneft and ONGC have been long standing partners in various hydrocarbon projects in Russia.

Subsequently steel-to-BPO conglomerate Essar, pitched a deeper equity alliance to Rosneft by offering a strategic stake of 50% minus 1 share in Essar Oil at a $7-$8 billion (Rs 42,000-Rs 48,000 crore) valuation. The company's market cap at Monday's closing was Rs 21,228.18 crore. ET in its March 25 edition was the first to report the talks between the two for what could culminate in a strategic deal.

Sources involved said the crudesourcing agreement is independent of the possible equity deal and is likely to get stitched up sooner. Essar Oil sources crude from various international and local sources. In FY14, for processing 20.23 MT of crude oil, its total import bill came to Rs 71,287.12 crore as against Rs 68,139.36 crore in FY13. A deal with Rosneft will further lower the company's reliance on Iranian crude supply, feel analysts.

"The two dialogues are happening simultaneously as both are keen to see it through. Although they are somewhat interlinked, the strategic discussions are still work in progress and will take longer," said an official in the know. He spoke on condition of anonymity. It is not clear if Essar officials will be part of an industry delegation that is visiting Russia later this week and if the sourcing agreement will be officially announced then. Essar Group CEO Prashant Ruia is also in Russia this week but sources said he is visiting for other reasons. The recent restrictions on Essar group co-founder Ravi Ruia's foreign travel imposed by a Delhi court has also slowed the discussions a bit, added another source.

In a response to ET's query, Essar said: "It is not our policy to comment on market speculations. The company has already informed the stock exchanges last week stating that there is no event or development which is required to be submitted to the stock exchanges as per the listing agreement."

A query sent to Rosneft remained unanswered. Another source added that Rosneft may be more interested to acquire equity stake in Essar's flagship Vadinar refinery.

The refinery accounts for the lion's share of the company's valuation. To minimise the total cash payout, Rosneft may pay partly in cash and partly in crude supply at a significant discount. Essar will have the trading right to swap the crude. The financial terms and the structuring details are still being fleshed out.

To cope with the collapse in crude prices that went to historic lows, Rosneft, like most industry peers, has cut capex plan for this year by 30% from 2014's estimated $14-$16 billion. Moreover, conflicts in Ukraine and the international sanctions have resulted in it getting locked out of global capital markets. Rosneft, which has more short-term debt than any other corporate borrower in Russia thanks to its $55-billion deal to buy out BP from its fractious joint venture TNK-BP in 2013, has had to refinance $14 billion of its debt in the recent months as it faced close to $21 billion of mostly foreign-currency debt maturing before April. But the company also has more than $20 billion of available cash as well as back up credit lines of about $6 billion to help cope with any potential crisis. It generated revenues of more than $146 billion in 2014 and earnings before interest, tax, depreciation and amortisation (EBITDA) of more than $28 billion.

Partly because of the rash of media reports in global and Indian press in the last few days, the Essar Oil stock surged to the highest level in more than four years. The shares climbed 4.7% to Rs 146.25 rupees, the highest since November 2010. The stock surged 42% last week, the most since the period ended April 2009.

In 2014-15, Essar Oil's gross revenue stood at Rs 92,983 crore, which was 13% lower than the previous year. This was primarily due to lower crude oil price, which fell by about 50% during the year. Profit after tax for 2014-15 grew by 12 times to Rs 1,521 crore from Rs 126 crore a year ago. Essar Oil runs India's second private largest oil refinery at Vadinar. It has a portfolio of onshore and offshore oil and gas blocks with about 1.7 billion barrels of oil equivalent in reserves and resources. The company also has 1,500 fuel retail pumps.

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