BW Communities

Where Caution Is King

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Reliance Industries KG-D6's floating production storage and offloading (FPSO) vessel is seen off the Bay of Bengal in this photo. (Reuters/RIL handout) Indian resources giants such as Oil and Natural Gas Corp 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 and other Indian firms away from large overseas targets, analysts say. That's in stark contrast to rival China, whose state-backed firms are plowing billions into Australian resources this year, including aluminium giant Chinalco's $19.5 billion tie-up with Rio Tinto. 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 outbound resources acquisitions have fallen nearly 86 per cent in the first quarter 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 Prabhudas Lilladher. Slim Funding 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 giants, 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 for which it forked out over £1.3 billion ($1.91 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, Indian energy giant Reliance Industries' 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 forays 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. Bark With No Bite? In January, state-run Steel Authority of India set up a joint venture with other government-run firms Coal India, Rashtriya Ispat Nigam, NMDC and utility NTPC 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, Rio Tinto's stake in Coal & Allied, and the massive Tavan Tolgoi deposit in Mongolia. And Indian firms were absent from recent Sino-Australian deals with OZ Minerals, Fortescue and Rio, nor are they named in rumoured auctions for Felix Resources. 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 giants Blackstone and Warburg Pincus, but no deals have been struck. All is not dead for India's appetite for resources, however. In March, India's Sterlite Industries agreed to buy bankrupt US copper miner Asarco LLC for $1.7 billion. And India's Essar Oil is set to buy a 50 per cent stake in Kenya Petroleum Refinery in Mombasa and upgrade the unit for a total investment of $400 million -$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. (Reuters)