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ONGC: Going global

Sep 11, 2003

ONGC, the domestic oil explorer, has gained significant ground in the last one month on the bourses. News regarding the company’s plans to start its deep-sea exploration and its various equity acquisitions abroad for sourcing crude oil has raised investor interest in the stock. ONGC is aggressively focusing on both domestic and foreign markets to increase its crude oil supplies. In FY04 itself, the company is planning to incur a capex of about Rs 160 bn. Out of this about Rs 100 bn would be incurred in domestic exploration while another Rs 60 bn would be incurred in acquiring equity investments abroad. In our previous article (ONGC: Targeting higher output), we had discussed about the thrust of the company in domestic exploration for FY04. In the current article, we take a look at various initiatives, which the company has taken in the current year through its arm ONGC Videsh Limited (OVL) for acquiring various equity reserves abroad.

Source: ONGC presentation

During the current year, ONGC through its subsidiary company, (OVL), made certain equity investments abroad. It has currently brought two oil exploration blocks in Sudan for about US$ 115 m. The company has bagged an oil block in Syria in consortium with IPR international against stiff competition from Chinese and European firms. The company has also acquired 2 on-shore oil and gas exploration blocks in Libya in consortium with Turkish Petroleum Overseas Company and has taken up a 49% holding in the venture. OVL’s entry into Libya will further increase the company’s business prospects in that continent.

While it has acquired equity assets in some countries it plans to further increase its presence across other countries also. For example in Kuwait, the company has plans to bid for oil producing block in consortium with global majors BP, Chevron Texaco and Exxon Mobil. With IOC, the company had plans to acquire about 10% equity in this block. ONGC Videsh along with IOC has initiated talks with Saudi Aramco, the world’s largest oil company, for an equity participation in the South Ghawar gas fields, one of the largest onshore fields in Saudi Arabia. Apart from this the government of Saudi Arabia has invited ONGC to offer it a slice of its (largest in the world) oil reserves. The Saudi government has invited ONGC to take up exploration and production in that country.

The story does not end here, OVL has also submitted two separate bids for purchasing 26 per cent stake each in two onshore exploration blocks in Africa, estimated to contain in-place oil reserves of over 4 billion barrels. ONGC through OVL is slowly making its presence felt globally. Till now the company has acquired stake in oil and gas fields in Iraq, Libya, Russia, Vietnam, Sudan and Sakhalin. Discussions are currently on with Myanmar, Iran, Iraq, Saudi Arabia, Kazakhstan, Korea, Tasmania and US for equity in oil and gas.

Though the aggressiveness with which the company is going on to acquire equity investments abroad looks promising, given the fact that the country is dependent on 70% of its crude oil requirements, one should however exercise caution. The reason being, the countries where it has acquired equity stake are politically sensitive ones. Given the history of most of the countries where ONGC has taken an equity stake, any tension in the region leads to disruption of supplies of crude oil and one must therefore exercise due caution on this front.

At Rs. 690, the stock is trading at a P/E multiple of 11.5x its annualized 1QFY04 earnings. Though there is high risk involved in the business of exploration both in domestic and foreign businesses we are enthused by the aggressiveness of the management and feel that the long term prospects of the company looks very promising. However we would reiterate that while the company has made aggressive investments abroad, actual supplies of crude might take a while to reach the Indian shores. Considering this, it is clear, any investment in the company’s stock has to be from a long-term perspective to avoid any short-term hiccups (political unrest).

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