A $13bn takeover this weekend of oil and port assets in India, spearheaded by Rosneft, was a landmark deal for Moscow’s state oil champion — and could prove just as crucial for commodities trader Trafigura.
The Switzerland-based company, one of the world’s three largest independent oil traders, has taken a 24 per cent stake in Essar Oil as part of its deepening relationship with sanction-hit Rosneft, the Russian state-owned oil producer.
For Moscow the deal is part of a broader geopolitical alliance with India, securing a market for Rosneft in the fastest-growing major economy, but for Trafigura it is the most ambitious oil investment to date, setting a marker for rival traders including Glencore and Vitol.
Coming just 13 months after the death of Claude Dauphin , Trafigura’s billionaire founder and talisman for 20 years, the single deal could eventually boost oil trading volumes by more than 10 per cent and define chief executive Jeremy Weir’s tenure at the privately held company.
“This is a very significant investment in a major Indian asset for Trafigura,” Mr Weir told the Financial Times on Sunday. The Australian derivatives trader and former banker was promoted to run the company in 2014.
“The deal positions our core trading platform for further expansion.”
The investment is not without risks. While Trafigura has not disclosed exactly how much it is paying, a near quarter stake in assets tied to a $13bn total deal — including assumed debt and working capital as well as the refinery, port and 2,700 Essar service stations — it is likely to be a large sum for a company that is looking to reduce its leverage.
To avoid adding debt to the balance sheet of the company, which is controlled by 600 senior traders, Trafigura has created a vehicle called Kesani Enterprises to hold its stake, alongside consortium partner United Capital Partners. The Russian fund will hold an equal 24 per cent stake.
The aim is to repay the financing through the refinery’s sales, with the loans secured against the plant’s assets. Rosneft says it will pay about $3.5bn for its 49 per cent. Essar Oil’s debt will remain at the level of the company and not be consolidated by Rosneft, the Russian oil group says.
Jean-Francois Lambert, a former head of commodity trade finance at HSBC, said it was a landmark investment for Trafigura and its chief executive.
“This is the first big deal for Jeremy Weir,” said Mr Lambert, who now runs a commodities consultancy.
“What it entails might actually define his leadership over the trading house.”
Commodity houses have enjoyed near-record trading profits since the oil price crash began in mid-2014, though conditions have toughened this year.
In March Trafigura said net profits had slipped 10 per cent to $602m in the previous six months, with earnings bolstered by a one-off $264m accounting gain. Vitol’s pre-tax profits fell more than 40 per cent to $650m in the first six months of 2016, following an exceptionally strong first half of 2015.
At the end of March, Trafigura’s adjusted total debt was $8.7bn, with a ratio of net debt to group equity of 1.4 times. Trafigura has said it wants to lower that ratio to 1.
“We still expect to see our debt levels come down this year,” Mr Weir said on Sunday.
The company has already doubled the amount of crude and refined products it trades to more than 4m barrels per day since 2012, partly because of increased collaboration in the past two years with Rosneft, the largest Russian oil producer.
Trafigura’s chief financial officer, Christophe Salmon, told Reuters last week it was a “long-term target” to trade similar volumes of oil to Vitol, which is the biggest independent handling about 6m b/d, or about 7 per cent of global demand.
Trafigura is expected to have a growing role supplying crude to the 400,000 b/d Vadinar refinery and marketing its refined fuels domestically and internationally. Situated on India’s west coast it has easy access to Middle Eastern oil markets, while Rosneft ships supplies of cheap Venezuelan crude.
Rosneft was hit with sanctions in 2014 over Russia’s involvement in Ukraine, though traders can still buy its crude and carry out short-term financing arrangements.
Rosneft chief Igor Sechin, an ally of Russian president Vladimir Putin, is keen to expand his company’s trading. He has forged close ties with Trafigura, making it the biggest exporter of Russian crude after China.
Trafigura recently added staff in India tasked with expanding its oil business in the country, which is seen overtaking China as the new centre of global oil demand growth. It is not ruling out further deals.
“We don’t look to grow volumes for the sake of volumes,” Mr Weir said. “But when we can do it profitably in a way that fits well with our main trading business we’ll always look at opportunities.”
Additional reporting by Jack Farchy in Moscow and Simon Mundy in Mumbai