ONGC: Well done

The offer price of 1,255 pence per share for Imperial Energy appears reasonable.

With a cash balance of approximately Rs 18,710 crore or US$ 4.3 billion at the end of FY08, ONGC should have little trouble paying for Imperial Energy, which it is seeking to buy through its subsidiary ONGC Videsh (OVL). The oil major has agreed to pay 1,255 pence per share, or a total of $2.8 billion, in what will be an all-cash deal.

Imperial is estimated to have proven and probable (2P) reserves of 920 MMBOE (million barrels of oil equivalent). Analysts estimate that this would translate into an EV/BOE of $2.3 -$3.1 and believe it to be an attractive valuation.

At the same time they feel that Imperial’s 174.6 MMBOE of proven reserves (1P) of crude oil and gas may turn out to be somewhat of a risk because of low permeability that could lead to operational hazards. They believe this might result in production targets not being met. Nonetheless, they agree that at the current offer price, the deal is an attractive one. Should ONGC need to up the offer because of a rival bid, the asset might become expensive.

ONGC’s offer price of 1255 pence per share was at a premium of 62 per cent to the market price on July 11, 2008, when Imperial broke the news. The average stock price over the last three months on the LSE has been 995.8 pence per share, which means the premium is lower at 26 per cent. Imperial’s exploration and production is focussed on the Commonwealth of Independent states.

In 2007, the firm’s realizations were at US$ 33.4 per barrel, a discount of 54 per cent to international prices, because of the high tax structure in Russia. Imperial reported oil sales of around US$20 million and operating losses of US$ 40 million in CY07. ONGC will need to ramp up production to leverage the acquisition. At the current price of Rs 1,006, the ONGC stock trades at a shade under 10 times its estimated FY09 earnings and is reasonably priced.