ONGC’s overseas arm ONGC Videsh, or OVL, has been on a shopping spree abroad. On Monday, it announced a $5-billion acquisition in Kazakhstan, following up on a $1-billion acquisition in Azerbaijan in September. These deals may be in line with its long-term strategy, but may not necessarily support the ONGC’ stock which has been languishing.
According to Sandeep Randery, head of research of BRICS Securities, OVL’s proposed $5-billion acquisition is front-loaded. The company, he says, has paid upfront for the asset that will start generating substantial cash flows only from 2016 onwards. However, the interest meter will start ticking immediately.
For the $5-billion deal, OVL will be paying ConocoPhillips, it will get an 8.4% stake in the highly prospective Kashagan field that holds an estimated 30 billion barrels of petroleum reserves, of which close to 12-13 billion are potentially recoverable. The field will commence production mid-2013 at 75,000 barrels per day, or bpd, which can be ramped up to 300,000 bpd by 2016 in the first phase. In the second phase of development, production is projected to top 1.5 mbpd by 2021, which has not been approved yet.
The projections may look grand, but the deal, if approved, will empty the company’s coffers, which held net cash of $2.3 billion at the start of this fiscal. “ONGC has used available cash and has committed long-term capital to a still uncertain large development (phase 2) and which will add little to its overall production in near term,” said a Credit Suisse report.
ONGC has long been facing a steady decline in its production, even though it continues to add substantially to its reserves with incremental discoveries.
Even without this acquisition, the funding of its annual capex programme has been a growing concern as operating cash flows fall short due to high subsidies. In FY12, the company posted . 30,600 crore of cash profits after paying . 44,466 crore as subsidies to downstream companies. However, its capital expenditure budget for FY13 is . 33,000 crore, with an equivalent figure for FY14.
ONGC’s domestic oil production business, which by far remains the biggest in its current portfolio, is not adequate to fund these acquisitions or the ongoing capex due to the growing subsidy burden.
Thus, ONGC’s recent buying spree may be good to secure energy sources for the country and meet its long-term production goals, but are hardly relevant to its near-term issues. That is why the buyout may not boost the company’s stock.
According to Sandeep Randery, head of research of BRICS Securities, OVL’s proposed $5-billion acquisition is front-loaded. The company, he says, has paid upfront for the asset that will start generating substantial cash flows only from 2016 onwards. However, the interest meter will start ticking immediately.
For the $5-billion deal, OVL will be paying ConocoPhillips, it will get an 8.4% stake in the highly prospective Kashagan field that holds an estimated 30 billion barrels of petroleum reserves, of which close to 12-13 billion are potentially recoverable. The field will commence production mid-2013 at 75,000 barrels per day, or bpd, which can be ramped up to 300,000 bpd by 2016 in the first phase. In the second phase of development, production is projected to top 1.5 mbpd by 2021, which has not been approved yet.
The projections may look grand, but the deal, if approved, will empty the company’s coffers, which held net cash of $2.3 billion at the start of this fiscal. “ONGC has used available cash and has committed long-term capital to a still uncertain large development (phase 2) and which will add little to its overall production in near term,” said a Credit Suisse report.
ONGC has long been facing a steady decline in its production, even though it continues to add substantially to its reserves with incremental discoveries.
Even without this acquisition, the funding of its annual capex programme has been a growing concern as operating cash flows fall short due to high subsidies. In FY12, the company posted . 30,600 crore of cash profits after paying . 44,466 crore as subsidies to downstream companies. However, its capital expenditure budget for FY13 is . 33,000 crore, with an equivalent figure for FY14.
ONGC’s domestic oil production business, which by far remains the biggest in its current portfolio, is not adequate to fund these acquisitions or the ongoing capex due to the growing subsidy burden.
Thus, ONGC’s recent buying spree may be good to secure energy sources for the country and meet its long-term production goals, but are hardly relevant to its near-term issues. That is why the buyout may not boost the company’s stock.
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