Geneva: Trafigura Group’s purchase of 24% of Essar Oil marks a strategic shift as the trading house builds its position in the fast-growing Indian market and deepens ties with Russia’s Rosneft PJSC.
Part of a $13 billion deal spearheaded by Russia’s state-controlled petroleum giant Rosneft, it’s the largest oil acquisition in the 23-year-old commodity trader’s history. The transaction is expected to increase market share for Trafigura, the third-largest independent oil trader that already handles more than 4 million barrels a day.
Trafigura won’t disclose how much it will pay for the 24% interest in the 400,000 barrels-a-day Vadinar refinery and a network of 2,700 Essar Oil service stations. Trafigura will use its own equity plus its stake in the refinery as collateral for bank financing, but said it doesn’t plan to tap the bond market.
The deal, first reported by Bloomberg News in July, will see Rosneft acquire 49% of Essar Oil as well as a port terminal and power plant that values the entire transaction, including debt, at about $13 billion. Trafigura has formed a special purpose vehicle with Russian private investment fund United Capital Partners called Kesani Enterprises that will hold the investment outside of Trafigura’s corporate structure.
“Essar Oil occupies a strategic position in the global oil market,” Trafigura chief executive officer Jeremy Weir, who took over the top job following the death of co-founder and former chairman Claude Dauphin in 2015, said in a statement. “It owns world-class refining and infrastructure assets that will create multiple synergies with our trading business.”
While the record Essar deal, which marks the largest single foreign direct investment in Indian corporate history, will give Rosneft a deep foothold in a market expected to overtake Japan as the third-largest oil user and the fastest growing crude consumer through 2040, it is also expected to boost Trafigura’s trading volumes significantly as it fights for market share with rivals Vitol Group, Glencore Plc and Gunvor Group.
Trading houses have been investing in physical assets such as mines, ports, terminals and refineries to diversify their operations away from being mere middle-men buying and selling commodities. Vitol, the largest independent trader, owns stakes in refineries with a total capacity of about 390,000 barrels per day. Gunvor, which once dominated the trade of Russian seaborne crude, owns three refineries in Europe with total daily capacity of about 306,000 barrels.
In exchange for its investment, Trafigura is expected to increase its share of crude supplied to the Vadinar complex, which is designed to run on heavy Iranian or Venezuelan crude. Trafigura is also expected to handle more of the products including diesel and gasoline produced at Vadinar, which is India’s second largest refinery.
Trafigura said that the transaction is “fully compliant with international sanctions.” The closely held trading house, which is owned by a group of 600 senior employees, has increased business with Rosneft even after the producer and its CEO Igor Sechin were sanctioned by the US in 2014 over Russia’s role in Ukraine crisis.
Using short-term financing arrangements, Trafigura has purchased large volumes of Rosneft crude by complying with sanctions that prohibit lending to the Russian company for periods longer than 30 days.
Trafigura’s current close relationship with Rosneft began in 2013 when Dauphin and Sechin signed a five-year $1.5 billion prepayment deal in St. Petersburg for the trading house to purchase as much as 10.11 million tons of crude. The deal was far smaller than similar prepay agreements struck with Rosneft by Vitol and and Glencore that same year worth a total of $10 billion.
Following record earnings from its oil-trading division in 2015 due to price volatility and a contango market structure that allowed traders to lock in profits by storing oil to be sold later at a higher price, Trafigura’s first-half profit fell 10% from a year earlier. Without a one-time gain from a deal in which Angola’s government acquired a dormant iron-ore mine, net income would have fallen by 50 percent.
The yield on Trafigura’s five-year bond due in 2020 widened 10 basis points to 4.42% on Monday, according to data compiled by Bloomberg.
Victoria Dix, a spokeswoman for Trafigura in Geneva, declined to comment further or provide details on the financing structure for the deal.
The company’s office in Mumbai currently employs about 600 people involved in both metals and oil trading as well as back office and support functions.
Trafigura’s 49% owned storage and retail business Puma Energy owns two small refineries, including a 20,000 barrel-a-day plant in Nicaragua and a 32,000 barrel-a-day refinery in Papua New Guinea. Bloomberg