OVL restructures in bid to realize ambitions
OVL is planning to acquire more producing assets and become an active operator, as it aims to more than double its output in three fiscal years
ONGC Videsh Ltd, the overseas unit of India’s largest energy explorer, is in the process of restructuring operations to help speed up acquisition and development of energy assets. The company is planning to acquire more producing assets and become an active operator, as it aims to more than double its output in just three fiscal years. Restructuring is crucial for ONGC Videsh or OVL, which has a target to achieve 20 million tonnes by 2017-18. Currently, the overseas subsidiary of Oil and Natural Gas Corp. (ONGC) produces 8.36 million tonnes of oil and oil equivalent gas (mtoe). “We are in the midst of a transformation. So far, we have operated as a small company, but if we have to achieve our plan, then we will have to act as a global oil and gas company with dedicated teams responsible for each area of operation,” said N.K. Verma, managing director of OVL. In the oil and gas industry, the entity that owns the majority stake in the asset and develops it is the operator, while other minority shareholders providing financial support and technical know-how are called participating interest holders. Currently, OVL is the operator in only one —Imperial Energy in Russia—of its 31 oil and gas blocks.
Verma said the target will be met largely by production from newer fields. “We want to be a standalone oil and gas operator with the capability of handling bigger projects in all possible geographies. That will require funds, manpower and a more organized structure,” he said. However, according to an analyst with a foreign brokerage, buying operating assets often acts as a drag rather than creating shareholder value. “OVL will have to buy operating assets to meet the targets, but this may not lead to value accretion for ONGC as only assets bought at a nascent stage tend to generate returns,” said the analyst, declining to be identified due to his firm’s policies. Even as the restructuring meant to increase production over the medium to long term gets under way, OVL’s contribution to the parent company’s profit is set to decline in the near term. In fiscal 2014, OVL had contributed 21% to ONGC’s overall crude oil output of 31.48 million tonnes (mt) and 11% to ONGC’s overall gas output of 27.72 billion cubic metres. Together, OVL produced 8.36 mtoe of crude oil and gas and contributed 15% to the total output in fiscal 2014. In revenue terms, OVL accounts for 26% of the ONGC’s revenue and 20% to profit after tax (PAT). With crude prices falling sharply, this contribution will fall. “OVL’s contribution to the overall PAT of ONGC is likely to come down to almost 10% this year. While OVL is expected to post a slight jump in production in fiscal 2015, the benefits will be largely muted due to the fall in crude prices,” said Dhaval Joshi, analyst with brokerage Emkay Global Financial Services. For the first half of the current fiscal, OVL has posted a 4% jump in production to 4.29 mtoe from 4.12 mtoe in the year-ago period. A report by Kotak Securities Ltd on 7 January added that ONGC’s profitability will get “negatively impacted from a sharp decline in crude oil prices given a significant contribution coming from oil production from overseas fields of OVL”. The report said other factors such as contribution from Cairn India Ltd and the falling price of ONGC’s own value-added products such as naphtha, cooking gas, kerosene and diesel, will also cut ONGC’s profitability. Verma acknowledged that the impact of falling crude prices will impact OVL’s contribution to ONGC’s revenue and profit, but declined to give estimates. From the beginning of the current fiscal till December 2014, benchmark Brent crude prices have fallen from $105.62 per barrel to $57.33 per barrel, down 46%. Verma, however, said the fall in crude oil prices is also an opportunity for OVL to be more aggressive in acquiring assets; the challenge is to identify and acquire strong operating assets.
