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India Funds Siberian Oil Quest With Its Cheapest Loans in Decade

  • ONGC signs $1.16 billion loan to finance Russia field stake
  • ‘We get much cheaper rates abroad,’ ONGC’s Srinivasan says

As energy consumption explodes in the world’s second-most populous nation, India’s state-owned oil companies are taking advantage of the lowest overseas loan costs in a decade to finance exploration in the wilderness of Siberia.

ONGC Videsh Ltd. signed a $1.16 billion nine-month bridge loan on May 19 to fund the purchase of a 15 percent stake in Vankor field in Siberia from Russia’s Rosneft OAO, data compiled by Bloomberg show. Indian Oil Corp. plans a $1.2 billion fundraising for Russian investments in three or four months, including short- and long-term loans, Finance Director A.K. Sharma said in an interview on Wednesday. The average margin over benchmark rates on non-rupee loans for Indian refiners and explorers was 74 basis points this year, the lowest since 2006, the data show.

“We expect this trend of overseas acquisitions to continue as upstream companies such as ONGC seek to fulfill their mandate to improve the nation’s oil security,” said Mehul Sukkawala, a Singapore-based analyst at S&P Global Ratings. “India’s government has taken significant measures to improve the operating environment for oil and gas firms.”

The country, which imports more than three quarters of its crude requirement, is expanding its energy assets overseas as the pace of economic growth in India outstrips other major nations. It consumed 4 million barrels a day last year, according to the International Energy Agency, and is expected to surpass Japan as the world’s third-largest oil user this year.

The funding for ONGC Videsh, the overseas unit of New Delhi-based Oil & Natural Gas Corp., accounts for the largest part of $1.6 billion in total overseas loans signed by Indian companies so far in 2016 for financing acquisitions, according to Bloomberg-compiled data. It was closed at a margin of less than 85 basis points over the London interbank offered rate, according to people familiar with the matter. While six-month U.S. dollar Libor touched a seven-year high of 0.9931 percent on May 31, it remains significantly lower than rates in India. The three-month interbank rate for rupees was at 7.15 percent on Friday.

“We get much cheaper rates abroad, since they are Libor-linked,” ONGC’s Finance Director A.K. Srinivasan said in an interview June 7. “Rates are low, so we will take advantage of that.”

The yields on ONGC’s 4.625 percent dollar notes due 2024 fell to 3.78 percent on May 17, the lowest since April 2015. The average spread for Indian dollar bonds over Treasuries touched a six-month low of 293 basis points on May 19, according to a JPMorgan Chase & Co index.

ONGC Videsh said in a May 31 statement that it completed the purchase of its holding in Vankor for $1.27 billion last month. Indian companies including ONGC and Indian Oil will get a 49.9 percent stake in the oilfield, India’s Oil Minister Dharmendra Pradhan said in an interview on Monday.

“I may visit Russia very soon to have the final arrangement regarding this position,” Pradhan said.

The acquisition loans market will continue to be driven by state oil companies, able to get favorable borrowing costs due to India’s investment grade rating, according to Sidharth Rath, group executive for corporate and transaction banking at Axis Bank Ltd.

Moody’s Investors Service rates ONGC and explorer Oil India Ltd. at Baa2, a notch above India’s sovereign score of Baa3, the lowest investment-grade rating. Indian Oil Corp. also carries a Baa3 ranking.

ONGC profits rose 12 percent to 44.2 billion rupees ($661 million) in the three months to March 31, beating the 23.8 billion-rupee median estimate from analysts compiled by Bloomberg.

ONGC had debt of 536 billion rupees at the group level, while cash and equivalents were 289 billion rupees as of March 31, according to Bloomberg data. On a standalone basis, ONGC has available cash of about 140 billion rupees and no debt, Srinivasan said.

“ONGC has not been impacted by low oil prices as much,” said Vikas Halan, lead analyst for oil and gas companies in South and Southeast Asia at Moody’s in Singapore. "There is very little debt on the balance sheet and there is lot of cash and other liquid assets. It is not facing the same problems as other companies globally are facing.”

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