Cash-rich Indian companies should take advantage of the depressed valuation of overseas oil and gas assets, whose value has dipped by as much as 40 per cent in the last four months, said a report by audit and consultancy firm Ernst & Young.
Crude oil prices, after hitting $147 a barrel in July this year, have dropped to around $55 because major oil-consuming nations have slipped into economic recession in the background of the global financial crisis.
"With the ongoing economic downturn and the resultant crash in oil prices, the valuation of oil and gas companies has decreased and this offers Indian companies the opportunity to buy global assets at more reasonable prices than earlier," said Dilip Khanna, partner, Ernst & Young's Oil and Gas Practice.
India, which imports more than 75 per cent of its oil consumption, has been actively looking at acquiring assets abroad to ensure energy security. ONGC Videsh, the wholly-owned subsidiary of India's largest oil producer ONGC, had recently submitted a bid to acquire London-based Imperial Energy, which has assets in Russia and Kazakhstan.
According to the report, the present global economic scenario has brought down the transaction value from $10.2 billion in 2007 to $9.2 billion in 2008.
"Credit-squeezed companies with attractive assets will be vulnerable to takeover. M&A activity will accelerate as companies would be unable to fund projects. Companies will be forced to look for alternatives such as farm-outs or strategic partnerships. Consolidation activity could pick up from second quarter of 2009," said Khanna at Oil & Gas India Summit 2008 -- Exploration and Production.
According to a report released by E&Y -- Upstream Oil and Gas Challenges and Opportunities -- volatile crude oil prices have eroded investors' and lenders' confidence in the exploration and production (E&P) sector, some US oil companies have resorted to share buybacks and committed to projects though they are short on liquidity.
The Dow Jones Oil and Gas Index has lost 51 per cent of its peak value, the report said.
The Canadian stocks on the other hand are experiencing redemption pressure from hedge funds, which are key investor group in junior oil and gas stocks.
In the UK, junior oil and gas stocks have been hit harder compared to those of international oil companies. A number of smaller E&P companies are likely to be acquired or would disappear in the next 6-12 months.
"This will be an opportunity to make more reasonably-priced acquisitions for international oil companies. National oil companies, however, can look at exiting from more mature basins. Assets will be cheaper as valuations are adjusted downwards due to declining crude prices. NOCs will be funded from sovereign wealth funds, especially in West Asia," adds Khanna.
Opportunities for Indian E&P companies will be around Africa, the US, West Asia, Southeast Asia and Australia.
However, a Gujarat State Petroleum Corporation official said, "Acquiring oil and gas assets for E&P companies will be good in the short run. But one has to look at how viable these assets would be in the long term. If national oil companies could look at exiting mature basins, why would anyone buy it?"
