We met Essar Oil management at the analyst meet yesterday. Key highlights of the discussion were as follows:
Refining business
Currently the 6.1 nelson complexity refinery is running at 15.0 mmtpa throughput
Phase-I expansion: The phase-I expansion is expected to be over by Mar-2011 and will increase the capacity and complexity from 14.0 mmtpa and 6.1, respectively, to 18.0 mmtpa and 11.8, respectively.
Phase-2 expansion: Company expects to get the financial closure done in Q2FY11 (zero date). Essar Oil expects the refinery to start additional 18.0 mmtpa by Mar-2013. Earlier, Essar Oil had put the start date by Mar-2012.
Capacity utilization and throughput: Capacity of the refinery which is 14.0 mmt is currently running at more than 15.0 mmtpa. After the expansion of the refinery to 18.0 mmtpa of nameplate capacity, the refinery would be capable of running at ~19.0 mmtpa. Post phase-2 expansion, the refinery will have a nameplate capacity of 36.0 mmtpa and would be capable of clocking 39.0 mmtpa.
Others:
Essar Oil will get 1.35 mmscmd natural gas for its refinery usage from Apr-2010, which will save USD 0.5-1.0/bbl of refining costs. is currently available
Essar has also signed 30,000 bopd of Mangala crude with Cairn India. EOL will start in April-2010 with 10,000 bopd and scale up to 30,000 bopd by Sep-2010. Post the Phase-2 expansion, Essar Oil would require 60,000 bopd of Cairn’s Mangala crude. Pricing to Cairn’s crude was similar to those of IOCL contract.
At a full phase-1 expansion the company expects to make USD 1.0 bn as EBITDA from its refining business
Upstream business
Essar Oil announced significant increase in gas resources. The table below shows the reserves/resources in the firm. We view that while the resources are large, they are still to be confirmed with a drilling activity.
As per the CPR (Competent Person’s report), the Rajmahal block has prospective resources of 4.7 tcf.
Raniganj asset will be the first to be monetized as it starts in next 3 months. Essar is constructing a pipeline to key consumption markets. However, there is a 1.50 mmtpa fertilizer plant coming up at Durgapur, which would require the entire gas quantum for next 3-5 years.
The Ratna PSC, which has been hanging for last 9 years, is very close to getting signed. The company expects the same to happen during this quarter. Essar management expects the Ratna fields to start getting monetized in next 14 months.
Our view
While there are upsides to our estimates of value from the E&P, there will be reduction in our estimate of SOTP of the firm as the phase-2 expansion is delayed and the phase-1 expansion has also been pushed out by 3 months. With high refining capacity and increasing upstream cash flows, the quality of the company’s earnings improves as the company inches towards monetizing the E&P/upstream assets.
