ONGC to Fund Africa Charge With $4 Billion Debt: Corporate India

ONGC Videsh Managing Director D.K. Sarraf
“Africa, especially East Africa, is becoming more and more interesting and prospective and we want to be in the thick of it,” said D.K. Sarraf, managing director of ONGC Videsh Ltd., in a telephone interview from New Delhi. Photographer: Pankaj Nangia/Bloomberg

Oil & Natural Gas Corp., India’s biggest explorer, is planning a record $4 billion overseas borrowing in its push for African assets after losing a Kazakh oil field deal to China National Petroleum Corp.

The state-owned company is seeking to raise the debt abroad in the year to March 31 to almost fully fund its stake purchases in Africa, D.K. Sarraf, managing director of its overseas unit ONGC Videsh Ltd., said in an interview. It announced its biggest deal this week in the continent, which holds 7.8 percent of the world’s oil reserves and 7.7 percent of natural gas.

“Africa, especially East Africa, is becoming more and more interesting and prospective and we want to be in the thick of it,” Sarraf said in a telephone interview from New Delhi. “The region is emerging as a liquid natural gas hub and companies with aspirations to grow quickly are rushing in there.”

With the rupee plummeting to an all-time low, borrowing overseas will help minimize currency risk as ONGC and smaller government-run rival Oil India Ltd. compete with Chinese explorers for energy assets. Securing fuel supplies is crucial for Asia’s third-biggest economy as Prime Minister Manmohan Singh struggles to narrow a record current-account deficit and revive growth from a decade low.

Output Drop

CNPC and China Petroleum & Chemical Corp. announced $8.8 billion of acquisitions this year in Africa, beating the $5.14 billion of deals by their Indian rivals, including the $2.6 billion agreement this week by ONGC for Anadarko Petroleum Corp.’s 10 percent stake in the offshore Rovuma Area 1 gas field in Mozambique.

ONGC, which is seeking to reverse a drop in output from its aging fields at home, plans to spend 11 trillion rupees ($163 billion) by 2030 to add reserves in India and overseas.

“Indian companies should look at buying assets in Africa before more discoveries are made because that would mean paying hefty premiums,” said Mayur Patel, a Chennai-based analyst with Spark Capital Advisors, who has a buy rating on the stock. “Africa is a good region to look at. It has lot of gas opportunities especially in Tanzania and Mozambique.”

Oil India, the nation’s second-biggest state-run explorer that bought a 10 percent stake in June jointly with ONGC in the same Mozambique gas field from Videocon Industries Ltd., is also seeking more in Africa, finance director T.K. Ananth Kumar said in a phone interview Aug. 27.

Oil Discounts

Once the deals are completed in the East African country, ONGC will have 16 percent interest, Oil India 4 percent and Bharat Petroleum Corp. 10 percent of the Rovuma 1 block.

The need to sell oil at a discount to refiners under a government mandate to cap inflation has eroded ONGC’s cash reserves, straining finances. Profit fell for the fourth straight quarter through June 30, the longest streak of declines in three years.

Net cash dwindled 16 percent to 130 billion rupees on March 31 from a year ago, pushing bonds to a four-month low on Aug. 20. The yield on ONGC’s 3.75 percent dollar debt due May 2023 has surged 311 basis points since they started trading on April 30 to 6.87 percent, according to Standard Chartered Plc prices.

‘Increasing Worry’

“The lower cash balance and profit are increasingly a worry and a constraint for ONGC,” said D.K. Aggarwal, New Delhi-based chairman of SMC Investments & Advisors Ltd., which manages $100 million of Indian shares. “But the government wants ONGC to get oil resources outside India because there isn’t enough at home and that’s a drag on the economy.”

ONGC shares gained 0.2 percent to 249.15 rupees in Mumbai trading today. The stock has declined 7 percent this year, compared with a 4.2 percent drop in the benchmark S&P BSE Sensex index. Oil India has lost 6.7 percent.

A cash crunch engineered by the Reserve Bank of India to rescue a plunging rupee has driven up benchmark five-year AAA rated local-currency corporate bond yields in India by 118 basis points to 10.29 percent this year. It touched an almost five-year high of 10.75 percent on Aug. 19.

Dollar-denominated bonds, when repaid with overseas earnings, help shield the company from a weaker rupee that inflates the value of the debt. The local currency has tumbled 16.5 percent this year, Asia’s worst performance.

“We’re likely to fund as much as possible, maybe even all of it, with overseas debt since it’s a dollar project in Mozambique,” Sarraf said in the Aug. 27 interview.

Missed Chances

ONGC in April sold $500 million of 10-year notes at 210 basis points over U.S. Treasuries and $300 million of five-year debt at a premium of 190 basis points, according to data compiled by Bloomberg.

Competition from other Asian nations often means missed opportunity for Indian state explorers. A falling rupee may also make overseas assets more expensive, said Neelabh Sharma, a Mumbai-based analyst with BOB Capital Markets Ltd.

In July, Kazakhstan’s government blocked ONGC’s $5 billion bid for a 8.4 percent interest in the Kashagan oil field, the nation’s biggest, according to the oil and gas ministry. CNPC will acquire the stake from the Kazakh government, people with knowledge of the matter said June 28.

Seven years ago, the Chinese company beat ONGC by paying $4.18 billion for PetroKazakhstan Inc., then China’s biggest overseas oil deal.

“After the rupee’s fall and rising subsidy burden, Indian oil companies may not be able to continue paying top dollars for acquisitions,” Sharma said “ONGC’s cash is fast eroding and they will have to rely on debt.”

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