Refining company Essar Oil’s profit numbers for the quarter to June was one of the worst in its history. But the worst appears over for the company. That is because of the capacity expansion which has been completed and significantly improves its ability to earn higher margins, a signal perhaps that this could well be the last loss-making quarter for the company. Its huge debt pile remains a major hurdle now, but recent events indicate some improvement on that front. So far, the company had a history of mostly losses and mounting debt as long delays in project execution led to it missing the bull run in the refining industry, cost escalations and the recent trouble with Gujarat over the state’s refusal to extend sales tax benefit hit it hard. However, it has successfully completed its planned capital expenditure taking its refinery capacity to 20 million tonne annually and a complexity level to match that of the local big daddy — Reliance.
The refinery’s improved complexity — a trade terminology which measures the ability to convert worse types of crude oils to make better grades of fuels — will prove a key to better margins and help it remain profitable even during the down cycle. It is confident of earning $7-8 on each barrel extra over the benchmark Singapore refinery margins calculated by the International Energy Agency.
The losses it incurred during the Jun ’12 quarter were due to the stabilisation period that its newly commissioned units needed. And the company has not wasted any time in making full use of its facilities. Essar Oil's MD and CEO, LK Gupta said that the company was now operating the refinery at 20 MTPA, which is its rated capacity. “The losses through the April-June ’12 quarter were mainly attributable to inventory losses of . 700 crore as global oil prices crashed. The rupee depreciation led to a loss of around . 150-200 crore, while interest and depreciation jumped on projects commissioning,” said CFO Suresh Jain. The company’s recent exit from the CDR mechanism and its ability to arrange $1 billion worth of loans to pay Gujarat as sales tax dues underline the credibility of the company’s future cash generation. The stock, although volatile, has not fallen much in 2012. These facts support the overall positive view on the company’s future.
The refinery’s improved complexity — a trade terminology which measures the ability to convert worse types of crude oils to make better grades of fuels — will prove a key to better margins and help it remain profitable even during the down cycle. It is confident of earning $7-8 on each barrel extra over the benchmark Singapore refinery margins calculated by the International Energy Agency.
The losses it incurred during the Jun ’12 quarter were due to the stabilisation period that its newly commissioned units needed. And the company has not wasted any time in making full use of its facilities. Essar Oil's MD and CEO, LK Gupta said that the company was now operating the refinery at 20 MTPA, which is its rated capacity. “The losses through the April-June ’12 quarter were mainly attributable to inventory losses of . 700 crore as global oil prices crashed. The rupee depreciation led to a loss of around . 150-200 crore, while interest and depreciation jumped on projects commissioning,” said CFO Suresh Jain. The company’s recent exit from the CDR mechanism and its ability to arrange $1 billion worth of loans to pay Gujarat as sales tax dues underline the credibility of the company’s future cash generation. The stock, although volatile, has not fallen much in 2012. These facts support the overall positive view on the company’s future.
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