Mumbai: Essar Group agreed to sell as much as 49% of Essar Oil Ltd to Russia’s OAO Rosneft, the world’s largest publicly traded oil company, in a deal that would be worth about Rs.13,400 crore at Wednesday’s market price.
The deal will give Essar Oil access to Rosneft’s crude output, and the Russian firm, in return, will get a toehold in the Indian refining and retail market. Essar Oil runs the 20 million tonnes a year Vadinar refinery and owns 1,600 petrol stations.
“The principles laid down in the term sheet, will be reflected in final documents, which will be subject to corporate approval,” Rosneft said in a statement without disclosing details.
News of a deal between the two firms was first reported by The Economic Times in March. On 15 June, Mint had reported that Essar Oil is likely to sell a stake to Rosneft.
Financial terms of the deal weren’t disclosed. Essar Oil’s market value was Rs.27,337.89 crore at the end of trading on Wednesday. Shares of Essar Oil gained 3.74% to Rs.188.60 on the BSE on Wednesday, a day the benchmark Sensex fell 1.72%.
“The parties intend to significantly increase the refinery’s capacity, which will bring the capacity level of 45 MTPA by the year 2020. The deal also includes a retail chain of 1,600 stations located in India, the parties plan to increase the total quantity of retail sites to 5,000 within the next two years,” Rosneft added in the statement.
An Essar Oil spokesperson declined to comment immediately.
The Rosneft deal will also help Essar Oil deleverage its balance sheet, said Nirmal Gangwal, founder and managing director at Brescon Corporate Advisors, India’s leading distressed debt resolution advisor.
“All high leveraged groups have to find a solution beyond mere debt restructuring. Either companies will have to dilute equity or sell non-core assets. In the case of Essar Oil, there are no non-core assets. It’s a timely and right step for Essar Oil,” said Gangwal.
Gangwal said lenders will be more comfortable to support a deleveraged balance sheet for future capital expenditure programmes of the company. The total debt of Essar Oil stood at Rs.25,311 crore as on 31 March.
Essar Oil said in November that it had put on hold a proposal to delist its shares after directions from capital markets regulator Securities and Exchange Board of India. National Stock Exchange has given its approval to Essar Oil while BSE is yet to give its go-ahead for delisting.
On 11 December, Essar Oil signed a deal with Rosneft to import 10 million tonnes of crude oil a year for 10 years. The agreement came during Russian President Vladimir Putin’s visit to India.
“The performance of the terms of the signed documents will have a substantial impact on the scale of economical cooperation between Russia and India,” said Igor Sechin, Rosneft’s chairman. “The goods turnover between two countries will grow more than 50%.”
Rosneft’s businesses include hydrocarbon exploration and production, upstream offshore projects, refining, and crude oil, gas and product marketing in Russia and abroad.
Essar Oil also has a presence in exploration and production. It has a portfolio of onshore and offshore oil and gas blocks with about 1.7 billion barrels of oil equivalent in reserves.
The signing of the term sheet between Essar Oil and Rosneft comes during Prime Minister Narendra Modi’s visit to Russia.
Modi arrived in Russia on Wednesday on a three-day trip after visiting two Central Asian countries.
Separately, Rosneft’s Sechin and Essar Group founder Shashi Ruia signed a long-term contract for oil supplies for the purpose of refining at the Vadinar refinery.
The document was signed in Ufa within the BRICS summit in continuation of the agreements reached in 2014 during Putin’s India visit.
“Rosneft expands market outlet and amplifies the volume of supplies to the region, where growing points of the world’s economy are concentrated. Thanks to this agreement, Rosneft grants itself a secure market outlet of crude oil, which will create an additional possibility of production planning and marketing,” the company said in a statement.
Source: Mint; 08 July 2015