State-run Oil and Natural Gas Corp has said it will acquire 8.4 per cent stake in Kazakhstan oil field Kashagan for about $5 billion from ConocoPhillips. The deal is expected to close by January 2013.
ONGC, India's fifth-biggest company by market value, has been investing to maintain output from its old fields. The Kashagan acquisition is the largest ever for ONGC and its third big acquisition in the Caspian Sea region in a little over one year.
Shares in ONGC gained strength after a muted start on Monday. At 10 a.m., ONGC shares traded 1.6 per cent higher at Rs 254 on the BSE while the broader Sensex was up 1.1 per cent at 18,747.
Phase one of Kashagan is expected to start mid- 2013 & achieve an output of 3,00,000 barrels per day (bpd). Production will eventually be ramped up to 4,50,000 bpd. Phase two of the development was earlier rejected by the Kazakhstan government for being too expensive and is now being reworked.
Leading brokerage Credit Suisse maintained its "underperform" on the stock saying the acquisition will add little to ONGC's production in the near-term.
"Credit Suisse estimates (only phase 1) value the 8.4 per cent at $3.5 billion. WoodMac estimates (with phase 2) value it at $5.7 billion. Paying $5 billion, ONGC has used available cash and has committed long-term capital to a still uncertain large project (phase 2); adding little to production near-term. We remain concerned on near-term output/earnings," the brokerage said in a report.
Another brokerage Jefferies maintained its buy call on ONGC with a target of Rs 302 even as it pointed that the poor track record in the block, with history of delays & cost over- runs, is a concern.
The block is running at least five years late - and cost overruns - are at least 2-times over budget, Jefferies said. Valuations are fair, but track record suggests caution, it added.
ONGC’s stake is conditioned to permission from Exxon mobile and Shell - both of which hold 16.8 per cent each and have the right of first refusal. Italian energy major ENI, French major Total and KazMunaiGas are the other partners in the block.
(With inputs from Thomson Reuters)