Essar Oil up over 22%, what's the trigger?

Oil & gas company Essar Oil's over-22 percent spike late Tuesday foxed analysts and punters alike. Meanwhile, the research house Goldman Sachs maintained a buy rating on the stock with a target price of Rs 110, an upside of over 45 percent from the current market price, after the company received phase III environmental clearance for the Raniganj coal bed methane (CBM) block.

On Monday, when the company received environmental clearance, the stock had not reacted. In fact, the company's share dropped 11.71 percent to Rs 72.75  on Monday.

Speaking to CNBC-TV18, SP Tulsian of sptulsian.com wondered if it is the handiwork of margin call. "If margin calls can get triggered in pure play PSU stock like NHPC, it can happen in Essar Oil as well."  

Essar Oil holds the largest coal bed methane exploration acreage in India.

While the environmental nod, granted by the government of India's Ministry of Environment and Forests is a positive for the company as it can now drill 650 wells, the stock's closure at Rs 88 today (amid large volumes) cannot be linked to this positive.  

In a block deal, 5 lakh shares of company changed hands at Rs 76.60 on Bombay Stock Exchange, which was worth Rs 3.83 crore. Trading volumes increased 6.7 times to 61,34,470 equity shares as against five-day average of 9,19,317 shares.

Goldman Sachs said with this approval, company's E&P business would take off.

According to the research house, this block is expected to contribute about 11 percent of Essar Oil's EBITDA (earnings before interest, tax, depreciation and amortisation) by FY15.

"Successful ramp-up in Raniganj CBM production would not only lead the market to fully appreciate the block's valuation but may also prompt the market to attribute some value to its other CBM blocks that are yet to be developed and which we value at about Rs 10/share," Goldman Sachs said.

"This environmental clearance allows the full field development of the Raniganj block, excluding forest area, and will enable Essar Oil to increase production to the targeted level of around 3 million standard cubic metres of gas per day (scmd), up from 60,000 scmd currently," the company said in its release sent to exchanges.