ONGC Videsh (OVL) is set to acquire Conoco Phillips’ 8.4% stake in the Kashagan oil field project for USD 5bn. Kashagan oil field is located in the Kazakh sector of the Caspian Sea. The deal is subject to various government approvals, Kazakhstan's as well as co-ventures' pre-emption rights. The transaction is expected to close in the first half of 2013.
Oil in place stands at 38bn barrels. Owing to the reservoir's complexity, the recovery factor is relatively low, about 15-25%. ENI's website states the recoverable reserves at 7-9 billion bbls. The first oil is expected from the field in H1FY13 and initial estimates peg production at 370-450 kbpd. Peak output is expected at 1.5mbpd towards the end of 2020.
''According to our estimates, OVL has paid USD 7.8 a barrel, which looks reasonable, broadly in line with carrying value of COP in Conoco's books. However, the value accretion potential of the deal hinges upon the cost recovery aspect and fiscal terms, given the significant cost overruns,'' said Prabhudas Lilladher.
''Moreover, the Phase-II development of the field is also stalled due to conflict on cost issues with the Kazakh government. The acquisition is a part of OVL' strategy to increase its production to 20MMTPA by 2020 from FY12 levels of 8.8MMTPA. ONGC, (Q,N,C,F)* with cash of USD 4 billion in its book at the end of September 2012, would be able to fund the deal but will now become a net debt company,'' it added.
It has recommended 'Accumulate' on the ONGC, with a price target of Rs 283 as compared to current market price (CMP) Rs 250 in its report dated Nov. 27, 2012.
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