Rosneft’s acquisition of Indian oil refiner Essar Oil would increase
Russia’s largest oil and gas company’s substantial financial debts,
Moody’s said on March 21.
On March 16, Rosneft (Ba1 review for downgrade) announced that it
plans to acquire a non-controlling 49% stake in Indian oil refiner Essar
Oil Ltd. (unrated).
“The deal would be credit negative for Rosneft because it has the
potential to increase the company’s leverage, and does not offer any
clear benefits for Rosneft,” said Denis Perevezentsev, vice president
and lead analyst for Rosneft at Moody’s. “Parties are currently
negotiating the deal terms, including acquisition price and deal
structure.”
Rosneft is Russia’s largest integrated oil and gas company, of which
the Russian government holds a 69.5% share via its fully owned agent
Rosneftegaz. The Russian oil company is under Western sanctions over
Moscow’s role in the Ukraine crisis which limits its ability to borrow
on global markets.
Essar Oil Ltd. comprises the Vadinar refinery with an annual capacity
of about 20 million tonnes and about 1,600 gasoline stations in India.
Upon completion of the acquisition, which Rosneft expects to complete in
June, Rosneft and Essar Oil Ltd. plan to substantially increase the
refinery’s capacity to 25 million tonnes and increase the number of
stations to 5,000 over the next two years, which will require
substantial capital expenditure.
Rosneft’s capex is fairly ambitious already because it plans to
increase its capex by up to 30% (in ruble terms) to 600-900 billion
rubles this year (about $9-$13 billion), subject to market conditions,
versus 2015 levels. Additional capital expenditures related to this
refiner over which Rosneft does not have control could stretch Rosneft’s
free cash flow and not offer the company a clear payoff, Moody’s said.
“We estimate that deal value would be $2-$3 billion. We note that
Rosneft had substantial financial debt of about $47.5 billion as of 30
September 2015 and prepayments received under long-term oil and
petroleum products supply agreements of about $43.4 billion as of the
same date that we treat as a debt-like item. Rosneft will have to repay
about $13.7 billion this year and $11.3 billion next year. Acquiring 49%
of Essar Oil Ltd. would be a substantial stretch for Rosneft, which is
subject to European Union and US financial sanctions and thus does not
have access to Western financing,” Moody’s said.
Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp
in Moscow, reminded on March 21 that it’s a package of deals. “Rosneft
is selling blocks in two upstream companies – Vankor and Taas-Yuriakh
[oilfields] – and its also buying into Essar in India, the downstream
company. So I don’t think it is one stand-alone deal but rather Rosneft
is getting something from a group of Indian companies and then is
spending the money,” he told New Europe. “I don’t think it could be
possible credit negative as taken as a whole. The acquisition of Essar,
the Indian downstream business, obviously is credit negative but seen as
a part of a package it is not.”
Meanwhile, Moody’s said it does not expect Rosneft to export oil from
Russia to the Vadinar refinery, despite having reported good refining
margins of about $8 per barrel and being the third-largest oil refinery
in India. “As such, synergies from this perspective seem doubtful. There
is also risk associated with Essar Group having become a private
company in December 2015. If the delisting leads to a deterioration of
corporate governance standards at Essar Group, it could increase
execution risks and prevent Rosneft from extracting value from the joint
venture. Essar Oil Ltd. has not paid dividends for the past several
years and it is not clear how Rosneft’s acquisition of this minority
stake will create value,” Moody’s said.
Rosneft’s proved oil and gas reserves as of September 30, 2015, were
43 billion barrels of oil equivalent, according to the Petroleum
Resources Management System, and daily production for the last 12 months
ended September 30, 2015 was 5.2 million barrels of oil equivalent.
Kokin told New Europe that Rosneft is eager to diversify its assets,
lessening its dependence on China. “I’m reading this as pure
diversification. You can’t sell everything to China because you are
probably creating too much risk for yourself if you are not
diversifying. You should probably consider other buyers of upstream
especially when upstream assets are concerned you basically don’t want
to have Chinese oversight effectively,” he said, adding that it is a
strategic concern.
“If you add to this that Russia in general, but Rosneft specifically,
has the obligation to pump so much oil to China and then you start
selling the upstream assets from which the oil comes also to China, it
creates this overexposure to China so India makes sense. The problem is
whether the Indians can come up with any funds because obviously they
are not so rich; they also have their own limitations,” Kokin said.
Rosneft Chairman Igor Sechin said on March 16 that the reached
agreements represent a shift from energy dependency to energy
partnership of both countries. “The signed documents literally mark the
turning of a new leaf in the cooperation between Russia and India in the
energy sector, reached in continuation of the agreements, achieved at
the highest level between the President of the Russian Federation
Vladimir Putin and the Prime Minster of India Narendra Modi,” Sechin
said.
http://neurope.eu/article/rosneft-deal-stake-indias-essar-debt-heavy/