Rosneft’s deals with Indian companies will have a mixed credit impact – Moody’s

The various asset farming deals that Rosneft – Russia’s largest integrated oil and gas company — announced recently with Indian state energy firms and its acqusition of Essar Group’s refinery will have a mixed impact on the company’s credit profile, Moody’s Investors Service said.

It said in a report the farming out of Vankor and Taas-Yuryah oil and gas deposits at fair valuations will generate by various estimates of $4 billion – $4.3 billion. These deals will improve the company’s liquidity profile while the Indian partners’ financial support will ease the burden to develop Taas-Yuryah deposit. If the cooperation is successful, it could pave the way to a joint development of fields neighbouring Vankor, Moody’s said in a report

It said Tthe potential $2 billion – $3 billion acquisition of a non-controlling 49% percent stake in Indian oil refinery Essar Oil Limited is credit negative as it has the potential to increase the company’s leverage while the benefits are not clear.

“We view the deals on farming out of Vankor and Taas-Yuryah oil and gas deposits as not having any immediate impact on Rosneft, although they would improve the company’s liquidity profile while the company remains under EU/US financial sanctions and will boost its presence in the important Indian oil market,” Moddy’s said.

Rosneft signed definitive agreements with the consortium of IOCL, OIL and BPRL to sell 29.9 percent in the charter capital of LLC TYNGD, which is a joint venture between Rosneft, owing 80 percent, and BP, owing 20 percent, to develop Srednebotuobinskoye deposit located in the Far East of Russia.

The deposit currently produces 20,000 barrels of oil per day (bpd) with an expected peak production of above 100,000 bpd by 2021. The deal value, by various estimates, is about $1.28 billion.

“We estimate that the ramp up of this field will require RUB150-RUB200 billion. The participation of external parties will ease financial pressure on the company in 2016-21, when the project will reach its full capacity, Moody’s said, pointing out that Rosneft would retain a controlling 50.1 percent stake in the asset and would continue consolidating TYNGD in its financials once the transaction closed.

Rosneft also signed a heads of agreement for the potential disposal of 23.9 percen in the CJSC Vankorneft, which is the owner of Vankor field and North Vankor licence, to the consortium of IOCL, OIL and BPRL for total consideration, according to various estimates, of about $2 billion.

CJSC Vankorneft is currently owned by Rosneft. In 2015 Rosneft agreed to sell 15 percent stake in Vankor to ONGC for total consideration estimated by various sources at about $1.27 billion and this deal is currently being closed.

Rosneft also signed a memorandum of understanding with ONGC to consider potential disposal of additional 11 percent in CJSC Vankorneft to ONGC. Vankor is Russia’s second-largest field, with low cost oil accounting for 4% of Russian production and currently producing oil at a peak level of approximately 440,000 bopd. Vankor is a well-developed low cost oil field located in Eastern Siberia.

Following these transactions, Rosneft would retain controlling 50.1 percent stake in CJSC Vankorneft and would continue playing a key role in developing Vankor oil cluster (encompassing Suzun, Tagul and Lodochnoe deposits coming on stream in 2016, 2019 and 2020, respectively, with combined peak capacity of about 200,000 bopd) leveraging on its partners’ financial support and technological expertise.

“We view the announced transaction regarding the potential acquisition of a non-controlling 49 percent stake in the private Indian Essar Oil Limited, which Rosneft intends to close in June 2016, as credit negative,” Moody’s said.

Essar Oil Limited 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 estimate that deal value would range at $2-$3 billion. We note that Rosneft has 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 total about $43.4 billion as of the same date, which we treat as debt-like item. Rosneft will have to repay about $13.7 billion and $11.3 billion of debt in 2016 and 2017, respectively,” Moody’s added.

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.

The Indian economy relies on growing imports of oil totalling more than 4 million bopd, with imports satisfying more than 85 percent of oil demand. The refining sector is therefore very important to Indian economy. This sector is quite fragmented in India with several state owned companies responsible for the majority of refining throughput. Vadinar refinery is responsible for only about 8-10 percent of oil refined in India.

 

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