OREANDA-NEWS. July 14, 2011. Oil major Essar Oil announced their first quarter numbers. Revenues have seen a jump of 37% at Rs 16,478 crore. In an interview with CNBC-TV18, Naresh Nayyar, MD and CEO of the company gave his perspective of the first quarter performance and divulged future plans.

Below is the verbatim transcript of his interview. Also watch the accompanying video.

Q: You reported a GRM of USD 7.4 in Q1 that’s down 9% QoQ. Given the strength in Singapore GRMs, why have the margins not been better than what was reported? A: Both are not comparable. After our parent company got listed in London Stock Exchange last year, we are reporting GRMs on a mechanism which is called current price GRM which is in line with the practice followed by most of the oil majors globally.

These GRMs report the refinery margin assuming that the refinery has brought the crude at today’s prices and sold the product at today’s prices. There are couple of factors which might have been the reason for this kind of variations. During this quarter, we exported quantity almost equivalent to about 34% of our production, largely driven by the increased exports of fuel oil which became more surplus in the country post availability of KG basin gas in the country.

As per our analysis, Singapore GRM is more focused towards the gasoline margins, whereas the Indian refineries are more focused in optimising the gas oil. If the gasoline margins are strong, then Singapore GRMs will look stronger and vice versa.

Q: Should we not compare your GRMs with the Singapore benchmark GRMs? Can you elaborate for us a bit on the phase I refinery expansion? Is it a long schedule and by when can we really see the benefits reflecting on your financials?

A: During the last quarter ended June 30, 2011, we have achieved a mechanical completion of a number of unit of our phase I refinery expansion and most of the balance unit apart from one unit will get mechanically completed during the current quarter. We have been taking a 35 day shut down starting from September 18. During that period, we will do the tie in and also achieve the revamping of units like crude distillation unit, FCC and SRU. Simultaneously, we are commencing the start up process of these units in a phased manner. We have to achieve full production in the first quarter of next year.

Q: What kind of an upside should we expect? What kind of upside will we see in the margins once the phase I is completed? A: Considering the light and heavy differentials, and post expansion, our refinery will have a complexity of 11.8 vis-a-vis 6.1 today which means that we will be able to process much heavier crude diet in total share of ultra heavy crude and our crude basket will go to as high as 90%. On the other hand, most of the heavy ends will be able to convert into more valuable middle distillates. Both these factors would result in a major upswing in our GRMs. If we go by the trend reported by many refineries with similar kind of complexity, this upswing can be between USD 4-5 per barrel.

Q: Your debt has come down post the promoter equity infusion. Can you elaborate a bit on the restructuring? When will the debt come down further significantly? A: Our total debt is about Rs 14000 crore, against an equity of Rs 7000 crore. Going forward, we expect the debt to peak to Rs 18000 crore. As new refinery and unit start generating cash flows when internal accruals become very strong, they gradually come down to reach to a debt-equity ratio of almost 1:1. We are also looking into various options for restructuring debt in order to reduce our gearing in order to reduce our interest costs.

The Board of Directors had recently approved that we should look into the option of raising USD 1.5 billion of foreign currency debt largely to replace rupee debt and take advantage of the foreign currency rupee arbitrage.

Q: Lets talk a little bit about your inorganic plans for which we perhaps might see more debt infusion. Could you say something about the international plans, Stanlow closure and other inorganic moves that might be seen by the company?

A: At a global level, Essar would like to own and operate a total refinery capacity of about a million barrels per day. With the completion of our phase1 expansion in Vadinar and the optimisation project currently under implementation, the total capacity in Vadinar will go up to about 400 thousand barrels per day.

 We have another 80000 barrels per day refinery in Mombasa where we have 50% share and Stanlow refinery which we are likely to complete the transaction within the next few weeks. It has a capacity of about close to 296 thousand barrels per day. This will add up to a total capacity of close to about 800 thousand barrels per day which Essar will be operating globally.

Going forward, we do not have any plans for any further refinery acquisition outside India. However, we are definitely looking into the further expansion of our refinery, but that is at a drawing board stage. Our immediate task and focus is that we should complete our phase I expansion. We should ensure that the unit stabilises and we get the production from the new units on a sustained manner.