The curious case of Essar Oil's share price

The share price of Essar Oil has nearly doubled in less than a month since the news of Russia's Rosneft buying nearly half of the company first hit the wires. 

The Economic Times had first reported in March this year that the Russian oil major was keen to pick up stake in the Indian company. The share price of Essar Oil reached a high of Rs 111.35 and a low of Rs 102.45 in March. 

The uneventful journey of Essar Oil's share price continued till June when the share price begun its climb. 

In the first week of June, the share price of the company jumped over 40%, the most since period-ended April 2009, as per Bloomberg. Also, the shares of Essar Oil saw an extraordinary jump in volumes. The company had to issue a clarification to the stock exchanges that, "as on date there is no event, information or development in the Company which is required to be submitted as per Clause 36 of the Listing Agreement."

On June 15, the share price of Essar Oil reached its highest level in four years following the news that Rosneft was closing on sealing the deal with the company. 

The company reiterated to the Bombay Stock Exchange (BSE), and said, "We would like to state that it is not our policy to comment on market speculations. The Company has already informed the Stock Exchanges last Friday, 12th June, 2015 stating that there is no event, information or development in the Company which is required to be intimated as per clause 36 of the listing agreement." 

By June 18, Essar Oil's shares were trading at Rs 158 a piece before cooling off to Rs 143.45 the following day. 

The shares remained range-bound for the next week before beginning an upmove on June 30 which took it all the way to Rs 188 per share on July 8. 

On July 8, the two sigend an agreement in Ufa, Russia during thr BRICS Summit. 

The share, on Thursday, gave up as much as 11%, the most in two years, on the news the promoters of Essar Oil are looking to delist the shares. Deven Choksey, managing director, KR Choksey Shares and Securities Pvt was quoted by Bloomberg as saying that the stock price had risen considerably on the likelihood of the deal and investors are aware of the delisting plans.  

At the time of writing this story on July 9, share price of Essar Oil was trading at Rs 179.25, down over 5% before reaching a day's high of Rs 198.20 per share. 

Even after the drop, the one-year return given by the company stands at over 70%. 

The plans:

Russia's top oil producer Rosneft will buy 49% stake in Essar Oil for about $3.2 billion after excluding the Mumbai-based firm's flourishing coal-bed methane (CBM) business.

Rosneft, the world's top listed oil producer, will get a hold in India's second biggest oil refinery as well as its 1,600 petrol pumps that will more than triple to 5,000 in two years.

The Russian firm will also supply 10 million tonnes a year of crude to Essar Oil's 20 million tonnes per annum Vadinar refinery in Gujarat for 10 years.

"Rosneft and Essar Oil & Gas Ltd / Essar Energy Holdings Ltd, companies incorporated and managed under the laws of Mauritius, have signed a non-binding Term Sheet with regard to Rosneft's participation in the equity capital of Essar Oil Ltd with a share of up to 49%," Essar Oil said in a statement.

The proposed transaction is conditional upon various factors such as due diligence, determination of the transaction price, execution of definitive transaction documents and receipt of requisite approvals, it said without disclosing the deal size.

Sources privy to the development said Rosneft will pay $3.2 billion for the 49% stake.

The deal, however, does not include Essar Oil's upstream portfolio comprising of five CBM blocks, holding up to 10 trillion cubic feet of gas resource as well as Ratna and R-Series oil and gas fields in the western offshore.

Promoter Ruia family hold 90.5% of Essar Oil, of which 65.6% is in the form of overseas depository shares.

The company is in the process of getting delisted through a share buy back. Market regulator Sebi had in November put the delisting process on hold over treatment of GDRs.

That issue has now been sorted out, sources said.

Essar may cut imports from Iran to accommodate Russian barrels. Essar depends heavily on Iran to feed its Vadinar refinery, importing about one-fourth of its oil needs from the Persian Gulf nation.

Rosneft is majority owned by the Russian government with BP Plc holding under a 20% stake and public shareholding at around 10%.

The twin stake and oil supply deals were signed by Rosneft Chairman Igor Sechin and Essar Group founder Shashi Ruia in Ufa, Russia yesterday evening on the margins of the BRICS summit.

Rosneft in a statement said the crude supply agreement enables it to expand 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," it said.

On the Term Sheet signed for Rosneft's equity stake, Rosneft said, "The principles laid down in the Term Sheet, will be reflected in final documents, which are subject to approvals."

"Rosneft participation in the refinery's equity capital will allow Rosneft to obtain a share in one of the biggest refineries in India and the Asia-Pacific region," it said.

The deal, Rosneft said, also includes marketing business whereby Essar operate a retail chain of 1,600 stations located in India. "From this base the parties intent to further develop both refining and marketing businesses in India." The implementation of the proposed transaction will increase the earning capacity of Rosneft operations in the region along the whole value chain and open new perspectives for the development of commercial activities in Asia-Pacific, will promote the expansion of the trading business' potential.

Sechin said the "agreement is of a strategic nature. The performance of the terms of the signed documents will have a substantial impact on the scale of economical cooperation between Russia and India. The goods turnover between two countries will grow more than 50%. The new formula of integrated cooperation opens wide perspectives for the development of dialogue, both in specialised and related areas".

Not disclosing the price, Essar said "appropriate disclosures shall be made in accordance with applicable law as and when any definitive steps in relation to the aforesaid are undertaken."

The crude supply deal, it said, was signed in pursuance to the Key Terms executed between the two companies in December 2014 at New Delhi.

"Essar Oil operates the second largest single location refinery in India and has a large requirement of crude oil that has to be primarily met by imports. This Long Term Crude Oil Supply Agreement with a large integrated oil company like Rosneft will help Essar Oil to diversify its supply sources, expand geographical market coverage and enhance supply security," Essar Oil statement said.

The contract will ensure supplies of 10 million tonnes per annum of crude oil and feedstock to Essar's Vadinar refinery over a period of 10 years. "Adequate operational flexibility is provided for the refinery to benefit from the international oil market opportunities," it said.

Vadinar refinery is the second biggest refinery in the country after Reliance Industries' Jamnagar refining complex.

Prashant Ruia, Chairman of Essar Oil hoped that the agreements will give a boost to increased cooperation in the hydrocarbon sector between India and Russia. 

(With agency inputs)