Essar Oil Ltd announced last week that it has commissioned a new isomerization (Isom) unit at its Vadinar refinery.

Oil tanks at Essar’s Oil Refinery Complex at Vadinar, India. File photo

It’s known that the company is expanding its Vadinar refinery’s capacity to 18 mtpa from 14 mtpa (or 300,000 bpd) currently. After the expansion, the complexity of the refinery is also expected to increase substantially.

Essar Oil also intends to further increase its capacity to 20 mtpa (405,000 bpd) by September next year through optimization.

All this collectively—expansion, higher complexity and optimization—is expected to give the company the ability to process about 87% ultra-heavy crudes.

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Essar Oil maintains that enhanced refinery throughput of 18 mtpa would start in the March 2012 quarter.

Analysts expect it to report healthy gross refining margins (GRMs) from the beginning of the next fiscal.

Refining margin is the difference between the total value of petroleum products produced by an oil refinery and the price of crude oil.

In the days to come, a key variable that investors should keep tabs on, after the commercialization of phase 1 expansion, is the improvement in the company’s earnings.

For the September quarter, Essar Oil posted a net loss of Rs166 crore against a net profit of Rs130 crore in the same period last year.

The performance was adversely impacted on account of a huge loss in foreign exchange. However, what’s perhaps a bigger concern is that the company’s loan funds on September were as high as Rs21,290 crore, which translates into a debt-to-equity ratio of 3.1. That does not offer much comfort in today’s uncertain times.

Investors are likely to take news flow regarding the progress of Essar Oil’s expansion in a positive light. However, it would be better to wait and watch for the impact of the expansion to reflect in the financial performance of the company.

The Essar Oil stock has underperformed the benchmark Sensex and the oil and gas index on BSE since the beginning of this fiscal.

This quarter, benchmark Singapore GRMs have been weak so far, and that should broadly reflect in the performance of Indian refiners.

Graphic by Yogesh Kumar/Mint

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