The Hindu Business Line : Imperial bid: OVL gets a fair deal in valuation

After the loss of PetroKazakhstan to China’s CNPC in 2005 and the subsequent false starts in Ecuador and Angola where it was outsmarted by its Chinese competitors, the successful bid for Imperial Energy must taste sweet indeed for ONGC Videsh Ltd (OVL).

The deal is still in a sensitive period with the possibility of a rival bid from Sinopec but an assessment of the overall scenario suggests that the chances of OVL successfully consummating the deal are high. For one, Sinopec has said that it has yet to decide if it will bid, which probably means that it is not interested and two, there are reports that Russian oil firm Rosneft has supported the deal and could even end up as an equity partner of OVL in the venture.

Going by first impressions, OVL seems to have got itself a fair deal in terms of valuation of Imperial Energy which has recoverable (proven and probable or 2P) reserves of 920 million metric barrels of oil equivalent (mmboe) as certified by well known reservoir consultants, DeGolyer and McNaughton. At $2.77 a barrel, the valuation compares favourably with other companies with producing assets in the same region of Russia such as Lukoil and Novatek which are valued (on market capitalisation) at $2.82 and $1.93 a barrel respectively.

A back-of-the-envelope calculation comparing Cairn India’s market valuation also speaks favourably of OVL’s valuation of Imperial. Cairn India has gross recoverable reserves of 772 mmboe while its market capitalisation of Rs 43,400 crore (as of Tuesday) works out to a valuation of $12.92 a barrel.

But this should be read with two caveats — the net interest of Cairn is much lower at 472 mmboe and the figure does not include reserves of the Ravva field, where the output is about 50,000 barrels a day now. But the broad picture is clear in suggesting that the valuation of Imperial is fair.

Siberian toehold

For OVL, more than Imperial’s total output of 10,000 barrels a day now (that is projected to touch 80,000 barrels a day in 2011 ), it is the chance to get a toehold in the West Siberian region that must be attractive.

This is one of the largest oil and gas producing regions in the world and there is the chance for OVL to expand its reserves considerably through acquisitions of neighbouring blocks when they are put up for auction. A partnership with Rosneft will be valuable in this context.

Of course, what will be OVL’s strategy in handling the output from Imperial’s fields remains to be seen. Transporting the crude to India is an option but chances are high that OVL may opt to sell the output in contiguous markets, as it is now doing in the case of the Greater Nile production in Sudan.

Imperial, OVL – A background

Imperial Energy

Founded in 2004, it is an independent oil and gas exploration and production company focussed on the Commonwealth of Independent States, in particular the Russian Federation. Listed on the London Stock Exchange.

2007 sales of $20 million and net loss of $43 million; proposed capital expenditure of $350 million in 2008 and $250 million in 2009

Operates in the Tomsk region of western Siberia, Russian Federation, and in north central Kazakhstan

Has a 75 per cent interest in Serkazgva, a limited liability partnership registered in Kazakhstan, which holds a licence over 2,022 sq km of exploration area in north central Kazakhstan, known as Torgai block

Reached a production rate in excess of 10,000 barrels a day in December 2007 and is targeting to reach 25,000 barrels by end 2008 to go up to 80,000 barrels by end 2011.

Has an aggregate pipeline network of 350 km to transport crude

ONGC Videsh

Acquired 11 exploration and production projects in six countries in 2007-08

Signed an agreement with Petroleous de Venezuela SA on April 8, 2008 for 40 per cent stake in San Cristobal oil field; to develop the field to increase production from 20,000 barrels a day to 40,000 barrels

Has participation in 38 projects in 18 countries – is operator in 18 projects and joint operator in two; 24 exploration, six development and seven producing

Share in production of oil and oil-equivalent gas increased to 8.80 million tonnes of oil equivalent

Consolidated gross revenues in 2007-08 of Rs 16,954 crore and consolidated net profit at Rs 2,397 crore in 2007-08