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The buzz on the deal between Essar Oil and Russian oil giant Rosneft Oil Company has finally come true. Essar Oil’s stock had started rising from Rs 98 in early June. Following the announcement on Thursday, it hit an intra-day high of Rs 198.35 (levels seen in September 2008) before closing at Rs 179.
On the face of it, the deal appears positive given that Rosneft will supply 10 million tonne of crude oil every year to Essar Oil for 10 years. Essar Oil operates India’s second largest single-location refinery with rated capacity of 20 million tonnes and this sourcing deal will help meet half its requirement of crude oil.
However, given that Essar group has also signed a non-binding agreement, wherein Rosneft will be buying up to 49 per cent stake in Essar Oil without giving further details, has left the Street guessing.
Second, while Essar Oil gets assured supplies, Rosneft also gets valuable assets. Essar Oil’s refinery has a complexity of 11.8, which is amongst the highest globally. Complexity indicates the ability of a refinery to process cheaper variety heavy crude leading to higher profit margins. Besides, it has 1,500 fuel retail outlets and another 1,500 are under implementation. Essar has a built-in supply chain in place that can be used and scaled up for retail sales. India’s oil and gas reforms (deregulation of retail fuels) have boosted the domestic industry’s prospects, making it attractive for international players. Essar Oil also has a portfolio of oil and gas blocks with about 1.7 billion barrels of oil equivalent in reserves and resources. Rosneft will become a co-owner in all these without a waiting period. But, what price it will be paying for these is not known.
Acquisition of stake by Rosneft also means that an open offer should be in the offing. Since the last six months average price of a stock is considered, the open offer price might not be attractive. But, given that Essar group has also been looking at delisting Essar Oil, the offer should likely be at a good premium.
Fundamentally though, analysts were not bullish. Post March quarter results and prior to this deal, analyst at IDFC Securities remained bearish. The recent run up thus seems an opportunity to exit. Pankaj Sharma, Executive Director & Head of Equities, Equirus Securities, too, says that purely from a price and its past performance standpoint, the stock has done well and is reasonably priced.
But, given the missing details, it is difficult for investors to take a call. Those having made good short-term returns can consider booking profits.
