MBIQUE BLOCK DEAL: ONGC, OIL may See Returns in Long Run Only

The signing of the much-talked about deal involving state-owned companies ONGC and Oil India to acquire the 10 % stake of Videocon Industries’ in the Rovuma field offshore in Mozambique could prove expensive, because of the long gestation period of the project. Although the deal will boost the hydrocarbon reserves of the buyers, it will take several years before the deal actually translates into revenues and profits. The amount—$2.475 billion which the consortium has agreed to pay for the 10% stake—values the entire block at $24.75 billion, which is around 12% higher than the valuation of Cove Energy-PTT deal in May 2012. This along with the recent rupee depreciation means the acquisition is at a considerable premium to the earlier transaction. Yet, funding the acquisition is not a major concern for both ONGC and Oil India, since both companies have adequate cash balances. The gestation period is going to be long for the project, which can support a 50 million tonne per annum LNG export terminal. Anadarko estimates first sales to start in 2018, which is subject to timely government approvals and project execution. The investment now and over the next few years will generate revenues only after five to seven years. The valuation which has been agreed upon and the long gestation could make this deal expensive, according to a few market analysts. A report from Barclays says that the valuations are 60% higher than the bank’s base-case value of $1.5 billion. This is based on assumptions such as $20-billion capex for the first two LNG trains, $13.7 per mmbtu LNG price, 35 TCF reserves and commencement in 2020. Undoubtedly, the acquisition will boost the hydrocarbon reserves of ONGC and Oil India considering the huge natural gas deposits discovered in the block. Anadarko, the operator of the field, has estimated the recoverable reserves in the range of 35 to 65 trillion cubic feet. The field is yet to be fully explored, which means there is a possibility of further accretion in the future. In the near term, the deal will not impact the earnings of ONGC and Oil India, other than the loss of interest income. In the long term, however, this asset could be critical.