Vedanta in talks to buy stake in Cairn India

Edinburgh, UK-based Cairn Energy Plc on Thursday said it was in talks with Indian billionaire Anil Agarwal’s Vedanta Resources Plc to sell a stake in its Indian unit, Cairn India, which operates oil and gas fields in Rajasthan and Andhra Pradesh.

“The board of Cairn Energy Plc notes the media speculation and confirms that discussions are taking place with Vedanta Resources Plc in respect of the disposal of an interest in Cairn India Ltd,” a statement posted on Cairn Energy website said. Vedanta also confirmed that talks were on.

Though the two companies did not give details, it is believed Cairn Energy may sell 12 per cent of its interest in Cairn India. Cairn Energy holds 62.36 per cent in its Indian unit.

Cairn India shares gained 2.41 per cent today to close at Rs 340.60 on the Bombay Stock Exchange. The share touched an intra-day high of Rs 344.90. At today’s closing price, the company’s valuation stands at Rs 64,623 crore. “There can be no certainty the contemplated disposal will occur or as to the terms of any such disposal. A further announcement will be made when appropriate,” the statement added.

Vedanta, the first Indian company to list its shares on the London Stock Exchange, is the country’s largest non-ferrous metals and mining company, with revenues in excess of $7 billion. In the past, too, the company had shown interest in getting into the oil business. Agencies quoted financial services major Credit Suisse as saying a “move into oil would be a very strange shift away from (Vedanta’s) core business of developing mines and smelters...We, therefore, struggle to see any strategic fit or synergies.”

Vedanta does have some indirect exposure to oil, as smelting is an energy-intensive process. But Vedanta’s power business is focused on coal-fired generation. “Primary investor concerns on Vedanta are on delivery of growth and over-leverage of the balance sheet. An oil deal will not help (the) sentiment,” said Credit Suisse.

The size of the stake and the structure of the deal will depend on Vedanta’s limited ability to raise extra funds, Credit Suisse said. The company’s net debt is already between $4 billion and $4.5 billion, and it plans $10 billion in capital expenditure over the next three years, the analysts said.

If Vedanta buys 12 per cent stake in Cairn India, its holding will be less than Malaysia’s Petronas, which had last year bought an additional 2.3 per cent stake in Cairn India from the British parent for around Rs 1,100 crore, raising its total holding in the company to 14.94 per cent. Cairn India, which has had many suitors in the past too, got listed on the Indian bourses in 2007 after Cairn Energy decided to spin off the company’s South Asian operations into a separate company.

Cairn India is the operator of the Barmer block in Rajasthan with a 70 per cent participating interest and its joint venture partner ONGC has a 30 per cent participating interest. Average crude oil production from Mangala oilfield in the block is currently over 44,300 barrels per day (bpd) and is being ramped up to the plateau rate of 125,000 barrels. According to Cairn India’s website, the block is estimated to hold reserves of 6.5 billion barrels of energy equivalent.

Cairn India is also the operator of Ravva oil and gas field in the Krishna-Godavari Basin where ONGC, Videocon and Ravva Oil are partners. The Ravva terminal has the capacity to handle 70,000 bpd, 95 mmscfd of natural gas and 110,000 bpd of injection water. The terminal also has the capacity to store 1 million barrels of crude oil onshore.

Cairn India holds material exploration and production positions in 12 blocks in west and east India along with new exploration rights elsewhere in India and Sri Lanka.