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Rosneft's 49% stake buy deal in Essar Oil is credit negative: Moody's

In Moody's view the potential acquisition of a non-controlling 49% stake in Essar Oil, which Rosneft intends to close in June 2016, is credit negative.

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Russia's top oil producer Rosneft may pay $2-3 billion to buy 49% 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 on Monday.

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% 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 $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 $47.5 billion as of September 30, 2015 and prepayments received under long-term oil and petroleum products supply agreements total about $43.4 billion, which are debt-like items.

Rosneft will have to repay about $13.7 billion and $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% 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. 

OJSC Oil Company Rosneft - in which the Russian state holds a 69.5% share via its fully owned agent OAO Rosneftegaz - is Russia's largest integrated oil and gas company.

Rosneft's proved oil and gas reserves as of September 30, 2015 amounted to 43 billion barrels of oil equivalent (boe), in accordance with Petroleum Resources Management System. Daily production for the last 12 months ended September 30, 2015 stood at 5.2 million boe. The company's consolidated refining capacity covers approximately half of the group's consolidated crude oil production.

For the nine months ended September 30, 2015, Rosneft reported consolidated revenue net of export duties and EBITDA of $66.8 billion and $15 billion, respectively. Moody's said together with the deal on Essar Oil, Rosneft had on March 16 also announced a number of deals at different stages with ONGC Videsh Ltd and a consortium of Indian Oil Corporation Ltd , Oil India Ltd and Bharat PetroResources Ltd about farming out of some of its assets in Siberia.

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