ONGC: Multiple gains from Russian oil deal

Vankorneft stake buy will form a third of OVL's production, say analysts

Oil and Natural Gas Corporation (ONGC)’s buyout of a 15 per cent stake in the Vankorneft Oil project in Russia has received a thumbs-up from most analysts, as there are clear benefits. The deal will enable ONGC’s overseas subsidiary, ONGC Videsh (OVL) to source 66,000 barrels of oil from Vankorneft daily or three million tonnes (mt) annually. Vankorneft is a subsidiary of Russian oil giant Rosneft. Analysts believe output from this project could provide a third of OVL’s production and say the deal valuation,  estimated to be between $1.27 billion and $1.35 billion, are also inexpensive.

“The deal value of 15 per cent stake is $2.46/ barrel of oil equivalent, lower than OVL & Oil India’s deal with Videocon’s 10 per cent stake at $2.97/ barrel of oil equivalent and CNPC (China National Petroleum Corp)-ENI deal at $2.8/ barrel of oil equivalent in Mozambique,” say analysts at India Nivesh Research.

This buyout will take OVL closer to achieving its medium-term production target. OVL aims to achieve oil and oil equivalent annual production of 20 mt by 2017-18 versus the 8.87 mt prevailing. Vankorneft seems to be in a phase of increasing production. According to the Rosneft website, the Vankor field produced 1,531 million barrels of oil in 2013, up from 1,297 million in 2012 and 1,063 million in 2011. While it will boost ONGC’s consolidated production, it is also a right time to acquire assets abroad, say analysts.

In the domestic business, reduction in subsidy burden as well as higher clarity on subsidy sharing negates the impact of falling crude oil prices and should boost net realisation for ONGC. Although net realisation estimates vary with crude oil price forecasts, analysts believe ONGC’s net realisations could be $50-51 a barrel in FY16 if crude oil price stabilises at $55 a barrel versus $45 a barrel in FY15. The company has been prudent in using lower crude oil prices to its benefit by steps such as renegotiating service contracts with drillers, which can reduce operating expenditure by 30 per cent.

In this backdrop, most analysts are positive on ONGC’s prospects. The stock trades at 3.5 times enterprise value to barrels of the oil equivalent. The average target price of analysts polled by Bloomberg since August stands at Rs 344, which indicates huge upside potential of 52 per cent from the current levels. However, a steep fall in crude oil prices and/or reduction in gas prices are downside risks for ONGC.