Oil and Natural Gas Corporation, through its overseas subsidiary, ONGC Videsh (OVL) acquired a 2.72% stake for $1 billion, which is equivalent to the entire cash held by the latter in its balance sheet as of FY12. However, analysts do not think that the buy will result in any meaningful contribution to the parent company’s earnings.
OVL acquired Hess’ stake in large oilfields in Azerbaijan, the biggest such fields outside of West Asia. However, the deal would increase ONGC’s production by only 1.6% and increase its proved reserves by 1.8%. Along with the oilfield, OVL has also picked up a 2.36% stake in an associated pipeline.
Not only is the field going to add little to the company’s financials, the investment has been done in a field that is already matured and perhaps reached its peak production. Hess in its statement on the exit from Azerbaijan said that it is in line with its strategy to divest mature and small working interest assets. Hess has a 20 per cent higher turnover than ONGC implying that the size of the oilfields is small for the both companies.
However, the essential difference in both companies’ view is the “mature” nature of the field. The fields were discovered in 1997 and Hess has been able to benefit from the growth in production of the field. As the field achieved maturity, which is the peak production that can be achieved, Hess decided to exit from it. Hess is not the first company that has exited from these fields. According to an HSBC report in August 2010, Devon Energy sold its 5.2% per cent in the oilfield for $2 billion.
A Reuters report said the output in the oilfield over the first six months of 2012 declined to levels not seen in 2007 at 16.8 million tonne as compared to 19 million tonne a year back. The loss has been attributed to repair work.
There seem to be only two reasons why OVL acquired the stake. First, unlike the companies exiting from the oilfield, OVL is a public sector company which has a mandate to secure oil assets worldwide in order to quench the country’s thirst for oil. Second, the stake was available at relatively cheap valuations. Devon’s stake sale of 5.62% for $2 billion was done when oil prices were ruling at $75 per barrel, says the HSBC report. Compared to this, the current oil price of $110 per barrel makes the acquisition price at $7.88 per barrel of oil equivalent (boe). As per Goldman Sachs, this compares favourably with $16 per boe that OVL had paid for Imperial Energy in 2008 (ONGC had to take a $400 million impairment in FY12 due to non-performance of the reserve in line with expectation). Other recent deals have been in the $19 per boe range globally.
Despite the fact that the company acquired the oilfields cheap, that it will not be earnings accretive defeats the entire purpose.