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India’s oil, mineral firms turn cautious on acquisitions abroad

India’s oil, mineral firms turn cautious on acquisitions abroad
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First Published: Tue, Apr 07 2009. 12 10 AM IST

Overseas expansion: An ONGC oil drilling facility at Bombay High, off the coast of Mumbai. The explorer, as also most other Indian energy firms, is currently not looking at overseas acquisitions. ONGC
Overseas expansion: An ONGC oil drilling facility at Bombay High, off the coast of Mumbai. The explorer, as also most other Indian energy firms, is currently not looking at overseas acquisitions. ONGC
Updated: Tue, Apr 07 2009. 12 10 AM IST
Hong Kong / Mumbai: Indian natural resources firms such as Oil and Natural Gas Corp. Ltd (ONGC) are likely to hoard cash and shun big overseas deals despite market expectations they should seize distressed firms struggling in the financial crisis.
Financing difficulties and fears of making the wrong move in a dismal market with little pricing visibility are scaring Reliance Industries Ltd (RIL) and other Indian firms away from large overseas targets, analysts say.
Overseas expansion: An ONGC oil drilling facility at Bombay High, off the coast of Mumbai. The explorer, as also most other Indian energy firms, is currently not looking at overseas acquisitions. ONGC via Bloomberg
That’s in stark contrast to rival China, whose state-backed firms are ploughing billions into Australian resources this year, including Aluminum Corp. of China’s (Chinalco) $19.5 billion (Rs97,500 crore) tie-up with Rio Tinto Group.
India was once expected to go toe-to-toe with China and scour the globe for quality mines, oil fields and other natural resources assets being sold on the cheap.
But that’s far from the reality. India’s resources acquisitions abroad have fallen nearly 86% in the first quarter of 2009 to just $170.7 million, Thomson Reuters data shows.
In China, first quarter outbound resources acquisition volume is up nearly a third to $21.2 billion.
“Given the global liquidity situation and resources available to the companies, such strategic acquisitions have clearly taken a backseat,” said Kamlesh Bagmar, a Mumbai-based analyst at brokerage house Prabhudas Lilladher.
Unlike China—where cross-border acquisition plans are driven by the government and are less bound by funding constraints—India’s government is unlikely to extend credit to state-owned companies, and banks are reluctant to lend to privately held firms in the current environment.
India’s oil firms, many of which enjoy state-backing, are particularly discouraged from striking out abroad, spooked by plummeting oil prices and a cloudy recovery outlook.
“There’s too much uncertainty around as far as the economic scenario goes,” said Vishwas Katela, a research analyst with Anand Rathi Securities. “That, along with volatile crude prices, may be deterring Indian oil explorers from looking at assets abroad,” Katela added. “Also, funding is an issue.”
ONGC, India’s largest energy explorer, already has its hands full, and is unlikely to make any big moves in the near-term.
Last year it agreed to acquire Russia-focused Imperial Energy Corp. Plc. for which it forked out over £1.3 billion, a price agreed upon when oil was around $130 a barrel.
US crude hovered around $53 a barrel on Monday down from a record $147 per barrel last July.
Last month, RIL’s top upstream official Atul Chandra said $60 a barrel is the “right” price for valuing potential oil exploration acquisitions.
Costs were falling more slowly than oil prices, prompting many oil firms to pull the plug on costly projects or slow investment plans, Chandra added.
Meanwhile, last month China encouraged its energy firms to make more ventures abroad to ensure the country’s energy security. “Appropriately obtaining global resources is our inevitable choice and legal right,” Liu Qi, deputy head of National Energy Administration, told an industry forum.
“Winning foreign resources is even more important than stepping up domestic production,” Liu said.
Analysts say Indian companies have been less successful in buying energy assets overseas than Chinese rivals with the same mission, partly because ONGC struggles to act decisively, which is often blamed on Indian bureaucracy.
In January, state-run Steel Authority of India Ltd (SAIL) set up a joint venture with other government-run firms Coal India Ltd, Rashtriya Ispat Nigam Ltd, NMDC Ltd and utility NTPC Ltd to buy coal mines overseas.
But so far, Indian companies are missing in action as serious bidders for major coal mines, including assets owned by Canada’s Teck Cominco Ltd, Rio Tinto’s stake in Coal and Allied, and the massive Tavan Tolgoi deposit in Mongolia.
And Indian firms were absent from recent Sino-Australian deals with OZ Minerals Ltd, Fortescue Metals Group Ltd and Rio, nor are they named in rumoured auctions for Felix Resources Ltd.
As for oil, ONGC is cited along with China’s energy giants as a potential bidder for Africa-focused oil and gas firm Addax Petroleum and Kosmos Energy Llc., which is backed by private equity firms Blackstone Group Lp. and Warburg Pincus Llc., but no deals have been struck.
All is not dead for India’s appetite for resources, however.
In March, Sterlite Industries (India) Ltd agreed to buy bankrupt US copper miner Asarco Llc. for $1.7 billion. And Essar Oil Ltd is set to buy a 50% stake in Kenya Petroleum Refinery Ltd in Mombasa and upgrade the unit for a total investment of $400-450 million, media reports say.
But analysts say caution will prevail in the near-term.
“While it makes strategic sense to acquire resources, commodity firms are forced to protect their balance sheets on a short-term basis,” said Bagmar of Prabhudas Lilladher.
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First Published: Tue, Apr 07 2009. 12 10 AM IST