ONGC Said to Plan Bond Sale to Fund Azeri Stake: Corporate India

ONGC Chairman Sudhir Vasudeva
Sudhir Vasudeva, chairman and managing director of Oil & Natural Gas Corp, said in August the discount which the government orders ONGC to sell crude oil to refiners have affected the company’s ability to acquire assets overseas. Photographer: Graham Crouch/Bloomberg

Oil & Natural Gas Corp., India’s biggest energy explorer, is planning to sell dollar bonds to fund a $1 billion acquisition in Azerbaijan, according to a person with direct knowledge of the matter.

The company may raise almost the entire purchase cost selling the notes next quarter through its unit ONGC Videsh Ltd., the person said, asking not to be identified because a final decision hasn’t been made. The planned sale will be the New Delhi-based parent’s biggest borrowing in three years.

ONGC Videsh, which needs $20 billion of investment to boost overseas production more than sixfold by 2030, is seeking cheaper funds abroad as rupee borrowing costs are about twice as much. State-owned ONGC is unable to lend to its unit as the discount it gives on crude oil sales to Indian refiners on government orders is depleting its cash reserves.

“The parent needs the cash for its own capital expenditure,” Kamlesh Kotak, Mumbai-based vice president of research at brokerage firm Asian Markets Securities Pvt. said by phone yesterday. “It makes a lot of sense to raise debt in dollars because earnings from the field will be in dollars and that guards against currency fluctuations.”

ONGC Videsh, which invests in and operates the parent’s assets abroad, agreed to buy a 2.72 percent interest in the Azeri, Chirag and Guneshli fields in Azerbaijan from Hess Corp., as well as a 2.36 percent stake in the Baku-Tbilisi-Ceyhan pipeline, according to a Sept. 8 statement. The acquisition will add to ONGC’s overseas reserves by 9 percent and increase production by about 11 percent.

The deal may close in the first quarter of 2013, according to the statement.

Biggest Since Imperial

ONGC Chairman Sudhir Vasudeva and Finance Director A.K. Banerjee didn’t answer two calls each to their mobile phones seeking comment.

The Azerbaijan purchase is ONGC’s biggest since 2009, when it bought Imperial Energy Plc, which has assets in Russia, for 1.4 billion pounds ($2.2 billion). The takeover was financed by selling one-year commercial paper for 52.5 billion rupees ($951 million).

The explorer refinanced that debt a year later through a $200 million loan and a bond and commercial paper sale in India equivalent to $800 million. ONGC and its units have 48.1 billion rupees of debt outstanding, including 34.4 billion rupees borrowed by ONGC Videsh, according to data compiled by Bloomberg.

Dollar Debt Premiums

ONGC Videsh’s plans to sell foreign currency bonds follows Bharat Petroleum Corp. and NTPC Ltd. as average premiums for the nation’s dollar debt over U.S. government debt fell 32 basis points to 388 this quarter, HSBC Holdings Plc data show. It was 367 basis points on Oct. 25, the narrowest since May 2011, according to the data.

Indian companies have raised $9.39 billion selling bonds overseas so far this year, compared with $9.17 billion in the same period last year, according to data compiled by Bloomberg.

Bharat Petroleum, India’s second-biggest state-run refiner, sold $500 million of 10-year bonds last month at a yield of 4.625 percent. NTPC, the biggest electricity generator, raised a similar amount priced to yield 4.75 percent in September.

ONGC’s long-term foreign-currency debt is rated Baa1 by Moody’s Investors Service, the third-lowest investment grade. Bharat Petroleum and NTPC are rated Baa3, the lowest investment grade.

Capital Expenditure

“ONGC will probably get a better rate than Bharat Petroleum as it has a stronger balance sheet and has very little debt now,” said Hemant Dharnidharka, head of credit research at SJS Markets Ltd. in Bangalore. “Raising the money wouldn’t be a problem as there’s a lot of cash currently available with banks.”

ONGC is spending 335.8 billion rupees on a capital expenditure plan in the year ending March 31 and 340.1 billion rupees next year, the person said. ONGC had net cash reserves of about 120 billion rupees as on March 31 and that may decline to about 40 billion rupees at the end of this financial year, Finance Director Banerjee said Nov. 8.

The company reported its biggest profit decline in almost four years after it gave $63.05 discount on every barrel of crude it sold to Indian state-run refiners in the quarter ended Sept. 30, according to a Nov. 8 statement. Its selling price of $46.80 a barrel in the three months was 43 percent lower than a year earlier.

‘Cash Squeeze’

“There’s a squeeze in their cash position and that’s worrisome,” said Neelabh Sharma, a Mumbai-based analyst with BOB Capital Markets Ltd., a unit of state-run Bank of Baroda. “This will continue for another year at least when they may start increasing oil production.”

The lower profit has made ONGC the worst performer in the 10-member BSE Oil & Gas Index this month. The shares declined 0.2 percent to 251.50 rupees as of 10:11 a.m. in Mumbai trading, taking this year’s drop to 2.1 percent compared with a 19 percent increase in the benchmark Sensitive Index.

The government orders ONGC and smaller rival Oil India Ltd. to sell crude oil to refiners including Indian Oil Corp. at a discount to partly compensate them for selling fuels below cost. The discounts have affected ONGC’s ability to acquire assets overseas, Chairman Vasudeva said in August.

ONGC is mandated by the Indian government to acquire oil and gas assets around the world to help meet the nation’s energy needs. Demand in Asia’s second-biggest energy consumer is forecast to more than double by 2035 to 49.2 quadrillion British thermal units from 24.4 last year, according to the U.S. Energy Information Administration.

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