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					Oil and Natural Gas Corp
Acquisition Note
August 29, 2008 Stock data
Sensex: CMP (Rs): Target price (Rs): Upside (%) 52 Week h/l (Rs): Market cap (Rs cr) 6m Avg vol BSE (‘000 nos): No of o/s shares (mn): FV (Rs): Bloomberg code: Reuters code: BSE code: NSE code: 14,048 1,000 1,067 6.7 1,387/780 213,834 2,388 2,139 10 ONGC IN ONGC.BO 500312 ONGC

Market Performer

Acquisition of Imperial: deal attractive on the face of it ONGC Videsh Ltd (OVL), 100% subsidiary of ONGC, has offered to acquire Imperial Energy Corp (IEC) for a sum of US$2.8bn. With 2P reserves for IEC pegged at 920mn barrels of oil equivalent (boe), the deal is valued at US$3.5/boe of 2P reserves. With almost 94% of the reserves being crude oil reserves, the valuations offered appear attractive. However, the taxation structure in Russia works as a big drag on realizations, which impacts net present value of the assets. In CY07, the realizations for IEC were about US$24/boe as compared to average WTI price of US$72.3/bbl. Impact of tax structure on realizations The government of Russia, with a view to benefit most out of the rising crude oil price scenario, has laid out tax rules for the E&P companies. Except for some regions in East Siberia and blocks with more than 80% depletion rate, mineral extraction tax is levied at 22% for crude oil prices above US$9/bbl. Additionally, there is an export tax, which increases with the rise in crude oil prices. It is nil for crude oil prices below US$15/bbl and rises to 65% for crude oil prices over US$25/bbl. At WTI price of US$100/bbl, the net export realizations in Russia would work out to US$26.5/bbl. IEC well funded for capex plans IEC has 2P reserves of 920mmnoe and has plans to drill a total of 128 production wells in CY08 and CY09 across six fields (Snezhnoye, Dvoinoye, Maiskoye, SouthMaiskoye, Festivalnoye and Kiev-Eganskoye). These fields account for more than 51% of the company’s total reserves. The total outlay for two years is estimated to be US$600mn. The company has raised US$600mn via rights issue in the month of April 2008 to fund the same. Hence, apart from the acquisition cost, OVL will not have to immediately pump in funds to carry out exploration and development capex. Synergies well in place OVL has a 20% stake in the production sharing contract for Sakhalin – I project in Russia, which has given it an exposure to the Russian regulations for the E&P space. Further, IEC is well connected to the Russian domestic markets through its existing pipeline network of 209kms. Additionally, it is setting up a pipeline of 152kms, which is expected to commence operations in September 2008. Increase in 2P reserves and production for ONGC If the acquisition goes through, consolidated (ONGC + OVL) hydrocarbon reserves (oil + gas) for ONGC would increase by about 11.4%. Oil reserves would increase by 19.6% as 94% of IEC’s reserves are crude oil reserves. Gas reserves are expected to rise only by 1.5%. IEC has an internal estimate of increasing production levels from 10,000bopd currently, to 80,000bopd by 2011. At this rate, it would be contributing close to 15% of ONGC’s current crude oil production. Too early to discount, retain Market Performer rating on ONGC With regulatory clearances pending, it would take some time before the deal is finalized. During the course, counter bids for IEC cannot be ruled out. Media reports have pointed out Sinopec as a major competitor to OVL. It is believed that Sinopec is currently in the process of evaluating the assets of IEC. Hence, it is too early to consider the effect of the acquisition in our earnings model. We retain our Market Performer rating on ONGC with a target price of Rs1,067.

Shareholding pattern
June 2008 Promoters Foreign & institutions Non promoter corp hold Others (%) 74.1 12.6 11.3 2.0

Share price trend
200 160 120 80 40 Aug-07 ONGC Sensex

Dec-07

Apr-08

Aug-08

India Infoline Research Team
research@indiainfoline.com

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Oil and Natural Gas Corp
Background of IEC IEC is an independent upstream oil and gas exploration and production company focused on the Commonwealth of Independent States and, in particular, the Russian Federation. Since its incorporation in 2004, IEC has acquired exploration and production licences, principally in the Tomsk region of Western Siberia, Russia. IEC has moved rapidly to identify substantial reserves to commencing and increasing production from its current fields. It has also created very significant and valuable infrastructure including major pipelines. Western Siberia is the most prolific oil producing part of Russia and is the home of some of Russia’s largest oil fields. The Tomsk region is one of the largest oil producing regions within Western Siberia. In addition, Imperial has a 75% interest in Sevkazgra, a limited liability partnership registered in Kazakhstan, which holds a licence over 2,022sqkm of exploration area in North Central Kazakhstan known as the Torgai Block. IEC’s area of operation

Source: IEC

Acquisition Note

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Oil and Natural Gas Corp
Reserve estimate for IEC’s fields
1P Field Buranovskoye Central Festivalnoye Chagvinskoye Dvoinoye Festivalnoye Golovnoye Kiev-Eganskoye Maiskoye Middle Glukhovskoye North Chertalinskoye North Festivalnoye Nyulginskoye Snezhnoye South Festivalnoye South Maiskoye Tamratskoye Vodorazdelnoye Total
Source: IEC

Oil (mmbbls) 2P 3P (1P+2P) (1P+2P+3P) 79.7 5.2 136.4 2.0 107.0 73.7 25.3 46.4 127.1 93.5 132.0 25.7 9.7 863.7 1.1 139.5 195.2 6.9 513.5 8.3 575.2 119.0 469.4 183.5 218.9 49.0 156.8 403.5 188.0 58.9 20.1 3,306.8

1P 0.8 0.2 2.8 1.3 0.9 2.4 2.4 10.0 7.2 0.2 0.3 28.5

Gas (mmboe) 2P 3P (1P+2P) (1P+2P+3P) 3.1 0.3 12.2 0.1 3.6 2.1 2.6 4.8 10.1 9.8 5.3 0.8 1.4 56.2 3.1 2.6 0.4 28.1 0.2 6.0 2.3 9.8 9.3 10.1 0.7 10.1 7.0 3.1 3.8 2.0 98.6

7.9 1.2 18.9 17.1 13.6 9.3 7.5 42.3 24.1 2.9 1.3 146.1

Production estimates for IEC
90,000 75,000 60,000 45,000 30,000 15,000 0 2007
Source: IEC

Capex plan of IEC over the next two years
US$mn Snezhnoye Dvoinoye Maiskoye South-Maiskoye Festivalnoye Kiev-Eganskoye Production capex Rigs Exploration capex Total
Source: IEC

bopd

2007 67 0.1 52 55 21 195 63 62 320

2008E 50 0.3 80 20 50 90 290 60 350

2009E 15 2 65 2 40 39 163 87 250

No of wells 39 1 42 4 23 19

128

2008

2009

2010

2011

The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from any error in this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. This document is not for public distribution and should not be reproduced or redistributed without prior permission.

Acquisition Note

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