India’s second largest national oil and gas company, Oil India, is scouting for assets as it seeks to meet the country’s energy needs.
“We are looking at M&A opportunities and are concentrating on producing assets that can generate cash flow,” Rupshikha Borah, finance director at Oil India, told FinanceAsia in a recent interview in New Delhi.
The company has been busy buying resources but has faced challenges in closing deals. Its bid for Royal Dutch Shell’s Nigerian assets earlier this year proved to be unsuccessful and, according to news reports, Dangote Industries, which is owned by Africa’s richest man Aliko Dangote, is the likely winner with the highest bid.
“We did look at Royal Dutch Shell’s assets in Nigeria and put in a bid but we lost out,” said Borah.
Oil is rarely found in peaceful places but resource-rich Nigeria is expected to attract more deal flow. “Nigeria remains an important investment destination for Indian and other Asian energy and natural resources companies and we expect to see further acquisitions there,” said David Blumental, a Hong Kong-based lawyer at Latham & Watkins who focuses on energy and natural resources.
As Oil India prowls for acquisitions, it has bumped up against expensive valuations in the region. “Producing assets are very expensive and hard to get,” said Borah. “After all the due diligence, very few acquisitions fructify.”
One deal that closed successfully in January was Oil India’s joint acquisition of Videocon’s 10% stake in Mozambique’s Rovuma play, a rich natural gas block off the coast, for $2.47 billion. Oil India jointly bid for the block with India’s largest state exploration company ONGC Videsh and holds a 4% stake in the block with the remainder held by ONGC Videsh. According to Borah, Oil India’s investment in Mozambique’s Rovuma 1 is about $1.8 billion, which includes its acquisition cost.
The Rovuma 1 block in Mozambique has seen a hive of M&A activity that kicked off in 2012 when PTT Exploration & Production bought Cove Energy, whose main asset was a 8.5% participating interest in the block, for $1.9 billion. Valuations have steadily risen. In August last year, ONGC Videsh agreed to buy a 10% stake in the block from New York-listed Anadarko Petroleum, the operator, for $2.64 billion.
Bharat Petroleum also owns a 10% stake in the block, and collectively, Indian companies have the largest stake in the block. “Asia, including India, given its geographic location is the natural market for liquefied natural gas (LNG) exports from East Africa,” said Blumental. “Given the growing importance of natural gas in India’s energy mix, Indian energy companies have been active in investing in Mozambique offshore natural gas plays,” he added.
Oil India is present in nine countries and it has 65 domestic exploration blocks and assets in countries spanning Gabon, Venezuela, Libya and Yemen. It has added smaller blocks, in Siberia, Myanmar and Bangladesh this year.
To fund its acquisitions, Oil India turned to the bond market with its inaugural $1 billion five and 10-year bond, which went towards refinancing a bridge loan taken for its Mozambique acquisition. The deal was one of the rare examples of a hefty bond that was issued without the participation of US investors.
“We were very pleased to see the positive and enthusiastic response of the market to our Reg-S bond issue,” said Borah. “The response as a matter of fact turned out to be even somewhat better than our expectations.”
Oil India is rated BBB- by Fitch and Baa2 by Moody’s, one notch above Moody’s rating of the Indian sovereign. Oil India’s debt levels are currently 1.37 times its Ebitda and Borah says the company plans to keep its debt to less than three times Ebitda for ratings purposes.