CAN India’s state-owned firms join hands to mount a counter-bid for oil exploration firm Cairn India after the surprising entry of Vedanta? These firms, despite their huge capital expenditure programmes earmarked for the next few years, appear quite capable of making a counter-offer, considering that the valuation does not appear prohibitively high. Both ONGC and Oil India have debt-free, cash-rich balance sheets and strong and growing cashflows. Despite their own capital expenditure plans — ONGC is set to invest close to Rs 25,000 crore annually, while OIL has planned to invest Rs 8,500 crore over the next couple of years — it may not be difficult for them to raise funds for a counter-offer. The debt that these companies can raise could be as high as Rs 50,000 crore before their debt-equity ratio touches 0.5. However, the critical issue is whether such a move makes sense. It was just two years ago that ONGC acquired UK-listed Imperial Energy for $2.1 billion with reserves of 860 million barrels. Using that as a benchmark, paying $8.5 billion for 51% of Cairn’s currently estimated recoverable reserves of 1.4 billion barrels may appear expensive.
“It will need an underlying assumption of crude oil price at $100 per barrel to justify the Rs 405 per share price for Cairn India. All visible upside for next 3-4 years appears captured in this,” noted Sandeep Randery, research analyst in BRICS Securities.
But a few analysts have argued that the Imperial and Cairn comparison is not fair. While Imperial’s assets were at a preliminary stage of development, production is fully underway in Cairn’s Rajasthan fields. It is set to reach its plateau of 175,000 bpd by end 2011 and holds the potential to ramp it up to 250,000 bpd, unlike in Imperial’s case where the production is stagnating at close to the 20,000-bpd level. Besides, Cairn India also holds stakes in ten other exploration blocks apart from the Rajasthan fields.
For a long-term player who has a 15-20 year horizon, the pricing may still make sense. Networth’s Diwan said, “Given the promising prospects for Cairn, it certainly is a good buy from a long-term perspective.” With Sesa Goa’s open offer for Cairn’s shares already on, oil PSUs need to take a quick call on their future course of action.
Among the oil PSU pack, not all of them have the ability and the resources to participate in a buyout now. “Given their cash-strapped conditions thanks to the subsidy burden, barring ONGC & OIL, it would be difficult for other oil PSUs to fund an acquisition of the Cairn scale,” noted Prakash Diwan, head-institutional business at Networth Stock Broking.
“It will need an underlying assumption of crude oil price at $100 per barrel to justify the Rs 405 per share price for Cairn India. All visible upside for next 3-4 years appears captured in this,” noted Sandeep Randery, research analyst in BRICS Securities.
But a few analysts have argued that the Imperial and Cairn comparison is not fair. While Imperial’s assets were at a preliminary stage of development, production is fully underway in Cairn’s Rajasthan fields. It is set to reach its plateau of 175,000 bpd by end 2011 and holds the potential to ramp it up to 250,000 bpd, unlike in Imperial’s case where the production is stagnating at close to the 20,000-bpd level. Besides, Cairn India also holds stakes in ten other exploration blocks apart from the Rajasthan fields.
For a long-term player who has a 15-20 year horizon, the pricing may still make sense. Networth’s Diwan said, “Given the promising prospects for Cairn, it certainly is a good buy from a long-term perspective.” With Sesa Goa’s open offer for Cairn’s shares already on, oil PSUs need to take a quick call on their future course of action.
Among the oil PSU pack, not all of them have the ability and the resources to participate in a buyout now. “Given their cash-strapped conditions thanks to the subsidy burden, barring ONGC & OIL, it would be difficult for other oil PSUs to fund an acquisition of the Cairn scale,” noted Prakash Diwan, head-institutional business at Networth Stock Broking.
No comments:
Post a Comment