India-based Essar Energy is rolling out new projects in oil exploration and production. But with possible regulatory delays, you'll have to wait a long time for profits. So, is now the time to buy? Phil Oakley investigates.
An India-based energy firm. Its power division has four plants with 1,600 megawatts (MW) of capacity and five times that number under construction, plus 450 million tonnes of coal reserves. Its oil exploration and production (E&P) division has estimated reserves of a billion barrels of oil and a trillion cubic feet of gas. Refining and marketing is covered by Vadinar refinery in India, the Stanlow refinery in Britain and a 50% stake in a Kenyan refinery. It also operates 1,385 petrol stations in India.
What is the company's history?
Essar is a spin-off from Essar Group a large Indian conglomerate. Essar Oil was founded in 1989 and in 1996 it became one of the first private companies to enter the Indian E&P sector. Essar's first power plant became operational in 1997. The company acquired a stake in the Mahan coal block in 2006. The Vadinar refinery commenced operations in 2008 and is currently being expanded. In 2010, the Essar Group combined its energy businesses to form Essar Energy plc. It listed its shares on the London Stock Exchange and the $1.8bn proceeds are being used to finance a large pipeline of energy projects.
Who runs Essar?
Naresh Nayyar is CEO and the company's only executive director. He is also the MD and CEO of Essar Oil. He joined the company in 2007 and was paid £794,000 in 2010. Chairman of Essar Group (which still controls Essar Energy via a controlling shareholding) is Ravi Ruia and Prashant Ruia is CEO and vice-chairman.
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Half-year results to the end of June 2011 saw revenues increase by 37% to $6.5bn and earnings before interest, tax, depreciation and amortisation (EBITDA) by 49% to $477.9m. Profit after tax increased by 84% to $206.2m. Refining and marketing was the star performer with EBITDA increasing by 73% to $385.7m, driven by improved refining margins. EBITDA from the power division increased by 9% to $108m. Profits from exploration and production remain negligible.
What's the outlook for Essar?
Essar expects refining margins to remain strong in 2011. Further out, profits from power, refining and oil and gas exploration rely on Indian GDP growth remaining strong. The company faces delays getting regulatory approvals for projects and accessing its supplies of coal. Net debt of $4.6bn is also quite high compared with equity of around $5.0bn. With gearing at these levels, both margins and cash flow could come under pressure if sales slow.
The analysts
Of the nine analysts surveyed by Bloomberg, six say "buy", two "hold" and one "sell". The average price target is 470p 82% above the current share price. Most bullish is JP Morgan with a 570p target. Deutsche Bank is most bearish with a 420p target. Our view: at 16.4 times prospective earnings, the risk-reward trade-off is not favourable. Profits may take longer to materialise than City analysts expect in the current climate.
The numbers
Stockmarket code: ESSR
Share price: 258p
Market cap: £3.35bn
Net assets (June 2011): $4.98bn
Net debt (June 2011): $4.62bn
P/E (current year estimate): 16.4
Yield (prospective) 0%
Directors' dealings
It is worth noting that none of the executive directors or the finance director (P Sampath) own any shares in the company. Some of the non-executives own a small number of shares.
The CEO has options over 204,444 shares that can be purchased at 523p per share more than twice the current share price. Ravi and Prashant Ruia have their ownership stake via their holdings in Essar Global, the controlling shareholder.
The only deal since the listing has been a purchase of 71,428 shares by newly appointed chairman Simon Murray, as shown on the chart.
Director and shares held
P Aiken: 14,285
S Adoula: 23,809
S Murray: 71,428
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Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.
After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.
In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.
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