Free Press Journal

Not clear of benefits to Rosneft on Essar stake buy: Moody’s



New Delhi: Russia’s top oil producer Rosneft may pay USD 2-3 billion to buy 49 per cent stake in Essar Oil, Moody’s Investor Service said but raised doubt as to how will acquisition of non-controlling stake will create value for it.

“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,” the rating agency said in a note today.

Essar Oil, it said, 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 Essar Oil’s 20 million tons a year Vadinar refinery refines about 8-10 per cent of crude oil refined in India. “Additionally, we do not expect Rosneft to export oil from Russia to the Vadinar refinery, despite it reporting good refining margins of about USD 8 per barrel and being the third largest oil refinery in India. As such, synergies from this perspective seem doubtful,” Moody’s said.

Stating that the acquisition would result in debts of Rosneft rising, it said the Russian firm has substantial loans of about USD 47.5 billion as of September 30, 2015 and prepayments received under long-term oil and petroleum products supply agreements total about USD 43.4 billion, which are debt-like items.

Rosneft will have to repay about USD 13.7 billion and USD 11.3 billion of debt in 2016 and 2017, respectively. “The acquisition of 49% in Essar Oil Limited could therefore become a substantial stretch on Rosneft’s liquidity profile, although parties will continue negotiating deal terms, including the acquisition price and deal structure, which are not yet fully agreed,” it said.

Moody’s said that in its view the potential acquisition of a non-controlling 49 per cent stake in Essar Oil, which Rosneft intends to close in June 2016, is credit negative. Essar Oil Ltd comprises a Vadinar refinery with an annual capacity of about 20 million tonnes and about 1,600 stations located in India.

The partners plan to substantially increase the refinery’s capacity to 25 million tonnes and increase the number of stations to 5,000 within the next two years, which will require substantial capital expenditure.

“We note that Rosneft’s capex is fairly ambitious as it plans to increase its capex (in Russian rouble terms) by up to 30% in 2016 compared with 2015, which will range between RUB600 billion and RUB900 billion, subject to market conditions.

“Additional capital expenditure related to this refiner where Rosneft doesn’t have control, could stretch the company’s free cash flows while the payback from such investment is not clear,” it added.