 "5 reasons why falling oil prices is bad news for Indian oil giants")
The Indian oil companies including ONGC, BPCL, Oil India, and RIL had gone on an energy asset buying spree overseas in the last few years with crude oil hovering at above $100 a barrel. But with Brent crude now falling 35% and at its 5-year low of $66 a barrel, the valuation of these assets have fallen sharply by as much as 25%, say analysts. Here are few reasons why falling oil prices will haunt these companies in 2015:
No takers: With valuation of all energy assets falling across the world, many Indian companies including Reliance has put its shale gas assets on the block. RIL is, in fact, expecting $4.5 billion for its 45% in a shale gas JV with Pioneer Natural Resources of USA. The only problem is that there are no takers. If the deal indeed takes place, analysts say, the valuation will be far lower than the expectations.
Uneconomical fields: Last year, the government-owned ONGC and Oil India took over 10% stake in Mozambique gas field for $2.5 billion from Videocon. Since then, the valuation of the field is down by as much as 25% say analysts. This means, BPCL, Oil India and ONGC are sitting on an asset whose valuation will continue to fall from its dizzying high of $25 billion of last year.
Falling Cash flow: With the oil assets requiring massive dose of investments to keep the wells flowing, falling oil prices would mean lower cash flows. This will impact the cash flows of the companies. Imperial Energy, a company taken over by ONGC is worse off as the $2.1 billion acquisition of Russia-focused Imperial Energy’s oil reserves turned out to be way below projections made prior to the purchase. Falling oil prices will just make matters worse for the company.
Foreign loans: As most of these acquisitions abroad have been done via debt taken abroad, any fall in oil prices will make the takeovers more expensive. The rupee is expected to fall against the US Dollar in 2015 to around Rs 65 to a dollar. This means Indian companies will have to pay more if the loans are to be paid from the cash flows of local companies. But if these companies have hedged their currency risk, then the risk is not that high.
Faster consolidation: The last oil fall in the 90s led to a consolidation in the global oil and gas industry with the bigger fish gobbling up smaller ones. While small oil companies will need cash to expand and big ones will need money to prop up their reserves, the Indian companies can either buy out smaller companies at a lower valuation or wait for the tide to turn. In either case, they will need cash to remain in the business.