The buyout of Essar Oil (98% stake) by Rosneft and its partners at a total value of nearly $ 13 bn is a landmark deal which opens up a whole new market for the buyer. The Essar refinery and its retails outlets would become the first to be run by foreign operators and can change the landscape of petroleum refining and retailing industry in the country. For Ruias, the current promoter of Essar Oil, it is a much sought-after deal to save the rest of its businesses.
Rosneft is an integrated petroleum exploration, production and refining company, majority owned by Russian government and BP (British Petroleum) having nearly 20% stake. Size of Rosneft can be estimated by the fact that its total production of more than 250 mmtoe (million tons of oil equivalent) recorded in 2015 is higher than India’s total consumption.! However, its refining capacity is quite limited at nearly 100 mtpa and Essar’ refinery with 20 mtpa will add significantly to its total capacity. The other factor to consider is that the company has significant debt on its books with debt-equity ratio of nearly 2.3:1. That probably is the reason why company had to sell stake in its exploration businesses recently to Indian public sector oil companies so that its debt level doesn’t go up further.
Essar Oil is a part of Ruia group with businesses spanning Steel, Power, Ports, Shipping etc. The group is facing major challenges in most of the segments but more so in the Steel business due to huge investment undertaken which coincided with global downturn. The sale of Oil business is a result of its failure to find a buyer for the Steel business. Oil business is quite profitable with operating profit of Rs 5,800 crore in FY15 estimated to have crossed Rs 10,000 in FY16. As per estimates, the group is sitting on a loan book of almost Rs 90,000 crore which should come down by half or even more, after this deal.
For Rosneft, it can be termed as a prize catch since the refinery is running well, relatively new and most importantly, located in high growth market. In the current scenario, setting up new greenfield capacity has become very challenging with issues such as land acquisition, environmental requirements etc posing much bigger risk to execution. Additional benefit is the presence of Essar Oil in petroleum retailing with nearly 1,500 retail outlets which Rosneft can leverage with its expertise in retailing and current low oil prices.
Yet, the deal has maximum significance from the perspective of petroleum industry so far dominated by public sector companies. How the competition and industry best practices evolve in the medium term would be interesting to watch out for..
(Image courtesy of Essar Oil website)