Vankor field acquisition: A positive for ONGC

Move comes at right time as low crude oil prices have turned valuations reasonable

Declining crude oil prices have been one of the reasons for upstream oil firms such as ONGC (Oil and Natural Gas Corporation) under-performing on the bourses. Though lower crude prices mean lower realisations, thus lower earnings for oil producers like ONGC, they have also provided opportunities. The oil assets in the international market are available at decent valuations. ONGC’s stake acquisition in Vankor Field is a step in the same direction.

ONGC, through ONGC Videsh Ltd (OVL), is acquiring 15 per cent stake in Russia’s Vankor oilfield for $1.26 billion. Located in Eastern Siberia, Vankor is Russia’s second-largest oil and gas field. Also, it is an oil-producing asset with proven reserves which reduces the risks significantly. Acquired oil assets generally take many years before the exact value accreted can be deciphered.

On valuation terms, analysts at Edelweiss say headline enterprise value (EV)/reserves of $3.2 per barrel of oil equivalent (boe) is at a premium to the average $2 per boe of oil for Russian-listed entities. This, analysts add, is justifiable because Vankor is largely oil-bearing. Also, this complements ONGC’s EV/reserves of $4.7/boe. Further, acquisitions made by OVL in a low oil price environment have generally been fruitful.

The government’s approval for the conversion of Rs 5,000-crore loan, extended by ONGC to OVL, into equity is another positive. The Rs 5,000-crore debt taken by OVL to fund the Mozambique gas fields, now converted in equity, means a stronger balance sheet for OVL.

While the company is doing its bit for building longer-term business prospects, its fortunes on bourses can reverse if oil prices bounce from current subdued levels. FY17 may not see oil prices as soft as they have been in FY16, say analysts. After a series of oil reforms, the subsidy burden, with rise in crude prices, will also not increase in the same proportion as in the past, and ONGC’s net realisations will improve at a higher pace.

Nitin Tiwari of Antique Stock Broking says if crude oil prices rise to $60-70 levels, the subsidy share will come to $9-10 a barrel in the worst case. Thus, net realisations will be $55-60 a barrel. Tiwari says at the current market price, the stock is factoring in muted crude and gas realisation of $45 a barrel and $4.2 per mBtu (million British thermal units) with no apparent scope of improvement.

On production front, marginal fields and Improved Oil Recovery and Enhanced Oil Recovery projects will help offset production decline from maturing fields.

The stock at Rs 234 seems to have bottomed out. Target prices (Rs 310, Edelweiss, and Rs 360, Antique) suggest gains ahead.