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Is OVL making the right acquisitions?

Source : BUSINESS_STANDARD
Last Updated: Fri, Dec 07, 2012 07:41 hrs

pONGC Videsh Ltd or OVL the overseas arm of state-owned Oil & Natural Gas Corporation ONGC will pay 5 billion to acquire ConocoPhillips&rsquos 84 per cent stake in a Kazakhstan oilfield The Kashagan field located in the shallow waters of the Kazakh North Caspian Sea is the world&rsquos largest development project The acquisition of the stake is likely to be completed by the first half of 2013 Production will start from mid-2013ppOVL with its 84 per cent stake will get 315000 tonnes of oil in the first year The share will go up to 42 million tonnes per annum in 2028 when all the three phases of the field have been fully developed This will help OVL offset the drop in production from its assets in Syria and Sudan which had brought its total output down by 7 per cent in 2011-12ppSome analysts have raised doubts on the wisdom of the deal Though the Kashagan field has been under development for 12 years involving an investment of almost 50 billion the output isn&rsquot great The cost overruns will mean thin margins for the owners of the field KazMunaiGas of Kazakhstan Exxon Mobil Royal Dutch Shell Total and now OVL ConocoPhillips&rsquos &ldquoinvestors should be happy to see the costly project in central Asia go&rdquo one analyst had saidbr br table width400 cellpadding2 tbody tr height20 styleheight 15pt td width573 height1 bgcolorccd7ddfont size2 faceTahomastrongSECURING SUPPLIESstrongfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolor95acb3font size2 faceTahoma colorffffffstrongPRODUCING ASSETSstrongfonttd tr tr height20 styleheight 15pt td width573 height28 bgcolorccd7ddfont size2 faceTahomastrong45strong interest in Block 061 Vietnambr Contributed 202 bcm gas 004 million tonne condensate in FY12fonttd tr tr height20 styleheight 15pt td width573 height34 bgcolorccd7ddfont size2 faceTahomastrong20strong interest in Sakhalin-I Russiabr Contributed 150 million tonne oil and 049 bcm gas in FY12fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong25strong interest in GNOP Sudan & GPOC South Sudan Contributed 132 million tonne oil in FY12fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong40strong interest in San Cristobal Projectspan stylemso-spacerun yes spanfontfont size2 faceTahomaVenezuela Contributed 089 million tonne oil in FY12fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong100strong interest in Imperial Energy Assets Russia Contributed 077 million tonnesspan stylemso-spacerun yes  spanoil in FY12fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong50strong interest in MECL Colombia Contributed 056 million tonnes oil in FY12fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong50strong interest in Al Furat Project Syria Contributed 050 million tonnes of oil & oil equivalent of gasspan stylemso-spacerun yes spanfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong15strong interest in Block BC-10 Brazil Contributed 045 million tonne oil and 002 bcm gas in FY12fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong2413strong interest in Block 5A South Sudan Contributed 017 million tonne in FY12span stylemso-spacerun yes spanfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolor95acb3font size2 faceTahoma colorffffffstrongDISCOVERED ASSETSstrongfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong11strong interest in Carabobospan stylemso-spacerun yes spanfontfont size2 faceTahoma1 Project Venezuela First oil expected in 2013fonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong60strong interest in Block XXIV Syria Force Majeure invoked since April due to US sanctionsfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong40strong interest in Farzad B Block Iranfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong17strong interest in Blocks A-1 & A-3 Myanmar Field development plan to begin in May 2013span stylemso-spacerun yes spanfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolor95acb3strongfont size2 faceTahoma colorffffffspan styleline-height 115EXPLORATORY ASSETSspanfontstrongtd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong100strong interest in Blocks 34&35 and 30in Blocks 25 26 27 28 29 34 35 & 36 in Cubafonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomaInterests inspan stylemso-spacerun yes  span5 blocks each in Colombia & Brazil 2 blocks in Nigeriafonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomastrong25strong interest in Satpayev Project Kazakhstanfonttd tr tr height20 styleheight 15pt td width573 height18 bgcolorccd7ddfont size2 faceTahomaInterests in one block each in Libya Iraq and Vietnamfonttd tr tbodytableppDid OVL overpay OVL Director finance S P Garg says the price was right &ldquoOnly the future will prove who was right and who was wrong&rdquoppD K Sarraf OVL&rsquos managing director had said after the Kashagan acquisition the company&rsquos appetite to acquire more assets remains and it is looking for opportunities in the US and North America It also sees opportunities in parts of Africa East Africa Brazil Venezuela Colombia central Asian countries and RussiappWhat bothers analysts is the earlier big-ticket acquisition done by OVL in January 2009 when it had bought Imperial Energy Corporation an independent upstream oil exploration and production company with its main activities in the Tomsk region of Western Siberia for 21 billion OVL invested another about 500 million in the asset However it is currently producing only 15000 barrels of oil per day against the projected 80000 barrelsppstrongWay aheadstrongbr OVL says it has drawn a road map to revive the sagging output by induction of new technology from the next financial year The company has invited expression of interest for gaining access to new technology to produce oil by drilling wells this yearpp&ldquoWe are finding a suitable technology to produce oil from the right reservoirs The entire area of Imperial has shale and is known to be oil-bearing We are looking for a technology partner to extract the same In addition to these two we the industry in the region are also hopeful of getting fiscal concessions from the government The twin impact will improve the financials from Imperial&rdquo says GargppIncidentally OVL had to book an impairment of Rs 1 953 crore last fiscal due to lower performance from the asset The company is concerned about Imperial&rsquos operations &ldquoWe are trying to introspect and evaluate what went wrong We want to ensure such instances do not occur in the future&rdquo he addsppGarg believes one should not single out the Imperial deal to assess OVL&rsquos performance &ldquoWhile evaluating OVL&rsquos performance one should adopt the approach applied to a mutual fund where negative performance of a few stocks is not relevant as long as the overall portfolio is healthy&rdquoppThe Imperial investment notwithstanding OVL is in sound financial health It reported a revenue of Rs 22637 crore and profit of Rs 2721 crore in 2011-12 Reflecting the good performance the debt-equity ratio of OVL has decreased considerably from 10 in 2003-04 to less than 1 now It has been financing about 70 per cent of investments from internal resources But is that good enough for OVL to take on the Chinese in the quest for securing energy assets across the worldppIndia has lagged China in acquiring energy assets worldwide and it is now keen to collaborate with China in this area Chinese state oil companies like CNOOC Sinopec and PetroChina have been among the world&rsquos most acquisitive oil firms in recent years With their financial independence these Chinese companies have been very successful in sealing big acquisitions while Indian public sector energy companies have not been as successful in closing big overseas acquisitions owing to delays in securing government approvalspp&ldquoWe can&rsquot really compete with China The best thing would be to collaborate with China&rdquo ONGC Chairman Sudhir Vasudeva had said recently ONGC and China National Petroleum Corporation CNPC are thus forming teams that will jointly look for assets to meet the growing energy needs of India and ChinappOVL currently has a presence in 31 exploration and production projects in 15 countries Vietnam Iraq Libya Syria Sudan South Sudan Iran Cuba Brazil Venezuela Russia Myanmar Colombia Nigeria and Kazakhstan The company&rsquos website says it is the company&rsquos vision and objective to provide energy security to the nation However one may question how does it ensure security for the nation when it ends up selling all its produce internationally Garg makes a point by saying that acquiring and operating assets overseas does not make a difference to the country so long as oil is freely available in the international marketpp&ldquoOne must realise that as a company we have control over the quantity of oil that we produce and in case of an emergency that quantity can be imported to India We have in the past brought several cargoes of crude from our overseas assets to Mangalore Refineries&rdquoppstrongSpurring explorationstrongbr Its success has also prompted other state-owned oil companies to join the global hunt for oil and gas Bharat Petroleum&rsquos exploration firm Bharat PetroResources has interests in 15 overseas exploration blocks primarily in Brazil IndianOil has teamed up with Oil India OIL for its overseas exploration ventures Oil India is also planning to float an overseas investment arm on the lines of OVL Earlier OIL and Indian Oil Corporation had set up a Mauritius-based special entity Ind-Oil Overseas in 2008 for acquiring oil and gas acreages overseas But the special purpose vehicle no longer exists and till its closure the venture did not acquire assets Ind-Oil Overseas was to look at prospects in the CIS and African countriesppOVL has played its cards fairly well by exercising a fair degree of risk mitigation in most of the projects by partnering with some of the leading international oil and gas names like Exxon Shell Rosneft Total ENI Petrobras CNPC Sinopec and Petronas It is expecting good results out of the exploration prospects over the next couple of years If proved successful in these ventures the company shall be adding reserves through the drill-bit mechanism thereby considerably reducing its overall acquisition cost of reserves However the company&rsquos business faces the biggest threats in terms of highly volatile oil prices geopolitical factors and changes in tax regime of countriesppIt had to take a hit of Rs 808 crore last financial year as the Venezuelan government imposed a windfall tax on the San Cristobal project Its business in Sudan and Syria has been affected due to geopolitical reasons The company participates and operates in varied environments both politically and geographically where exploration production and development is more challenging technologically operationally and financiallyppONGC Videsh had earlier set a production target of 20 million tonnes of oil and gas by 2020 However this target date was advanced to 2018 in November last year Further a target of 60 million tonnes was set to be achieved by 2030 As the production targets are quite steep involving compound annual growth of more than 14 per cent up to 2017-18 and 9 per cent from then to 2030 OVL needs to concentrate on acquiring assets in development and production phase initially and then concentrate on high potential exploration acreages and also venture capitalist type of opportunities This will involve substantial fund requirement &mdash to the tune of 20 billion The company needs to keep its balance sheet deleveraged for this This will also require acquiring retention and training of manpower with special skill sets revamping of many internal processes and taking a relook at the way business development is to be done in futurep


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