Saturday, February 19, 2011

Essar Energy set to acquire Shell refinery for $350 mn

Essar Energy on Friday announced that it has entered into an exclusive agreement with Shell UK for the proposed purchase of an oil refinery and other associated assets at Stanlow, near Ellesmere Port in Cheshire, for $350 million in cash.

The deal brings Essar Energy and Shell to the penultimate stage of two-year negotiations that also saw a brief hiatus last year, only to be revived after Essar Energy completed its $1.3-billion IPO and subsequent listing on the London Stock Exchange.

The deal will be the third largest by an Indian group in the UK, following Tata’s acquisition of Corus ($8.1 billion in 2006) and Jaguar Land Rover ($2.3 billion in 2008).

Successful conclusion of the deal, even at the current capacity utilisation of around 75 per cent, should give Essar an additional $7-8 billion in revenues at current crude prices, said Essar Group CEO Prashant Ruia, in a telephone interview from Mumbai.

He said the company would continue to keep its strategies open for further acquisitions in the oil sector, provided there is a clear fit in its scheme of operations.

According to the new deal, Shell has granted Essar Energy exclusivity to the acquisition until April 1, 2011. Essar Energy has the option until March 31, 2011 to enter into an asset purchase agreement.

If by that date Essar Energy decides not to proceed with the acquisition, it will pay Shell a break fee of $50 million. Similarly, Shell has agreed to pay Essar Energy a break fee of $10 million if it chooses not to go ahead with the sale.

In a statement issued here, Essar said that the acquisition of the Stanlow refinery, which is the second-largest in the UK, will give it direct access to the UK market. Naresh Nayyar, Essar Energy's chief executive, said, “Stanlow fits very well with our strategy of providing options for the export of high-quality products from our Vadinar refinery in India. After completion, we look forward to working closely with the refinery management and employees to develop the business and we will be investing in operational improvements to optimise the facility and enhance production.”

Essar Energy said it is acquiring the Stanlow refinery at a competitive price, compared with other recent similar transactions. The price of $350 million for the 296,000-barrels-a-day plant translates to $1,182 a barrel of daily throughput, compared with BP’s Coryton refinery sold in 2007 to Petroplus for $8,140 a barrel, Total’s Milford Haven refinery sold to Murphy Oil in 2007 for $3,307 a barrel, PDVSA’s Ruhr Oel refinery in Germany sold to Rosneft in 2010 for $3,376 a barrel and Total’s Vlissingen refinery in the Netherlands sold to Lukoil in 2009 for $8,439 a barrel.

With the completion of the acquisition, Essar will also take on board 960 workers at Shell’s Stanlow refinery. In the first six months of 2010, the facility reported earnings before interest, tax, depreciation and amortisation (Ebitda) of $62.7 million and a gross refining margin of $4.90 a barrel.

Average industry benchmark gross refining margins were $2.73 a barrel in the first half of 2010.

Under the terms of the agreement, payment for the Stanlow refinery will be made in two stages, with $175 million payable on completion of the acquisition and a deferred payment of $175 million plus interest payable on the date of the first anniversary of the completion of the acquisition. Payments from Essar Energy to Shell for the acquisition will be funded from existing cash resources and potentially from a new debt facility.

The Stanlow refinery currently accounts for around 15 per cent of production from UK refineries. It produces approximately 3.5 billion litre of petrol a year, which is one sixth of the UK total, plus it produces around 1.5 billion litre of kerosene a year, used for aircraft fuel.

Deal size could touch $1.3 billion

There was some confusion about the actual size of the proposed Essar Energy-Shell deal for the Stanlow refinery in the UK. While Essar said it was paying $350 million, the Shell website stated, “Shell on Friday confirmed it has received an offer from Essar Energy to buy its 272,000 barrel-per-day Stanlow refinery and associated local marketing businesses in the UK for a total expected consideration of some $1.3 billion.”

Frantic calls between Mumbai and London helped clarify that the deal size is in fact only $350 million, which is the price Essar will be paying for the refinery assets. The balance, which Shell at this stage believes to be $900 million, is for the inventory lying on site, including crude, work in progress and finished products. “You don’t expect us to buy a working refinery drained of its inventory, do you,” asked a senior Essar executive in Mumbai.

A Shell spokesperson here later confirmed that the $1.3 billion it is claiming to be the deal size includes the inventory along with the refinery assets that Essar plans to buy. “Beyond this, I cannot say anything,” said the spokesperson.

Successful conclusion of the deal will be subject to employee consultation, in which both Essar and Shell will participate

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