IHS Global Insight Perspective | |
Significance | Essar Energy is planning to float up to 25% in new shares on the London Stock Exchange (U.K.) as the company aims to increase its international profile and to obtain access to funding to support an ambitious expansion programme. |
Implications | The funds will likely go into expanding Essar’s refining and power generation capacity. The company has outlined goals to more than double its power generation and refining portfolios in the mid- to long-term. |
Outlook | The initial public offering bodes well for liquidity on the global financial markets, but it is also an indication of the rise to prominence of companies from South-East and East Asia. |
Essar Energy, the energy arm of the Indian industrial conglomerate Essar Group, revealed today that it is planning to hold an initial public offering (IPO) of its shares on the London Stock Exchange (LSE-U.K.), it was reported by international media. Essar Oil, which is active in the exploration and production (E&P), refining and petrochemicals, and power generation and distribution segments is planning to raise some US$ 2.5 billion. The IPO will comprise of the issuance of new shares, equivalent to as much as 25% of the company’s issued share capital. Essar Group will continue to hold 75% of Essar Energy. The company estimates that upon completion of the IPO Essar Energy will qualify for inclusion in the FTSE 100 index, the share index of the 100 most-highly capitalised companies on the LSE. Essar further confirmed that Essar Energy will continue to operate its oil and gas integrated arm, Essar Oil, which is partially listed on the Mumbai Stock Exchange (India) and the National Stock Exchange of India. Essar Energy holds 88.58% of Essar Oil. Commenting on the plans for an IPO, company chairman Ravi Ruia said in front of Dow Jones that a London listing "gives [us] an excellent platform to showcase the potential of the Indian market to the world, and to give investors a unique, London-listed, liquid vehicle to access and share in the Indian growth story". Ruia further noted that the IPO should be expected “in the coming weeks” and that it will not be accompanied by a de-listing of Essar Oil’s shares traded on the two Indian exchanges.
Funding Expansion Plans
The proceeds of the IPO will most likely be directed to support Essar Energy’s ambitious growth plans. The company is aiming to further enhance its already considerable presence in its core market, India, and to increase its international profile. One of the key components of the company’s growth strategy is the expansion of its refining capacity. Essar Oil already operates one 280,000-b/d refinery at Vadinar, on India’s western coast, and it has a 50% stake in Kenya Petroleum Refineries Ltd., which operates a facility with refining capacity of 80,000 b/d. Essar has already outlined plans to increase Vadinar’s refining capacity to 360,000 b/d and, overall, Essar Energy has set the goal of expanding its global refining capacity to 1 million b/d. In addition to the planned upgrades at Vadinar, which according to a Platts report are expected to require an investment of US$1.6 billion, Essar is reportedly negotiating the acquisition of three refineries in the U.K. and Germany from Shell (see Europe: 6 April 2010: European Refiners Look for Exit as Margins, Demand Remain Low).
The company has already expressed interest in expanding its exploration and production profile. Essar Oil has interests in the Ratna and R-Series fields near the Mumbai High field in the Mumbai offshore basin, as well as in a block in Mehsana in the western Indian state of Gujarat, which has already commenced commercial production. The company also operates two coalbed methane (CBM) blocks in Raniganj in West Bengal and at Rajmahal, which is located in the neighbouring Jharkhand state in eastern India. Internationally, Essar Oil has three onshore oil and gas blocks in Madagascar and one offshore block each in Vietnam and Nigeria. A report by UpstreamOnline has placed Essar’s 2C reserves at 148 mmboe. Recent reports have suggested that the company is on the lookout to acquire more overseas assets, preferably in Africa and South-East Asia.
The power generation and distribution business is also set to undergo considerable expansion. The current generation capacity of Essar is 1,220MW, but this figure is set to increase to over 6,000MW by 2012. The cost of development of the additional generation capacity, which will consist primarily of coal-fired plants, is assessed at US$4 billion. The company’s long-term goal is to develop a generation portfolio of over 11,400MW.
Outlook and Implications
The IPO of Essar Energy has the potential to be the largest IPO in Europe since the onset of the financial crisis in the summer of 2008. It will be the second large-scale IPO of an energy company following the floatation of Poland’s largest utility, PGE, last November at the Warsaw Stock Exchange (WSE), which generated nearly US$2.1 billion. It further marks an emerging trend of increased activity on the financial markets in relations to initial public offerings in the U.K. According to Dealogic, cited by Dow Jones, there have been 6 IPOs in the United Kingdom since the beginning of 2010, compared to a total of two last year. The upcoming deal could also be seen as an indication of the growing importance of South-East and East Asian companies in the global energy market, given that a large proportion of recent energy-related deals have taken place with the participation of Chinese and Indian companies.
The listing on the LSE will certainly be a boost for Essar Energy, as it will not only generate much-needed cash, but will also enhance the international profile of the company. The decision to list Essar Energy in London may also be an indication of the company’s intention to proceed with the acquisition of the refinery assets from Shell. Commenting on the prospects of the deal last week in front of the Wall Street Journal (WSJ), the CEO of Essar Group, Prashant Ruia, said that the group is evaluating the deal in light of the trend of shrinking demand and refining margins in Europe, thus driving expectations that Essar may decide against the acquisition. Still, the prospects of obtaining a foothold in Western European markets at a time when high-quality assets can be purchased cheaply and when the energy arm of Essar is about to debut on the LSE, may ultimately weigh in favour of a deal with Shell. Acquisition concerns aside, the proceeds from the IPO will certainly be a valuable boost for Essar Energy given that the company has a significant debt burden. Citing data from Edelweiss Securities, Dow Jones reports that Essar Oil’s net debt is expected to reach US$3.3 billion in the year through March. Data from Dealogic also suggest that the debt load of Essar Power may be in the vicinity of over US$1 billion. A comparison with a likely valuation of Essar Energy of approximately US$12 billion suggests that proceeds from the IPO will add much-needed liquidity to Essar’s balance sheets.