The secret behind Venugopal Dhoot's biggest success

Spearheading the discovery of a gas bonanza in Mozambique and watching his investment rise tenfold in three years, Videocon's Venugopal Dhoot has become the most successful maverick in oil and gas business in India. Why, then, is his company so undervalued?

Will you be shocked on being told that Videocon's Mozambique gas acreage may end up having six times more potential reserves than Reliance and BP's Indian crown jewel at the Krishna Godavari basin?

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A fortnight back when the news of the two brand-new discoveries in Mozambique -Atum and Golfinho - broke, Kuldeep Drabu, a key lieutenant of Videocon's Venugopal Dhoot, and D Rajkumar, MD and CEO of BPCL's oil and gas exploration arm, Bharat PetroResources (BPRL), were in Singapore, attending an India Infoline-hosted investor conference.

Each company has a 10 per cent stake in the block. Even though they tried to remain composed, all hell broke loose after the announcement of the find.

An additional discovery of 10-30 trillion cubic feet (tcf) of recoverable natural gas resource has instantly doubled the total reserves to 60 tcf. Even at a 50 per cent probability of recovery success - "P2 or proven plus probable reserves" in industry parlance - it's a jaw dropping 42 tcf of natural gas.

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To put it in context, this is twenty times India's current annual gas consumption and enough to fire 42,000 mega watts of power plants, more than the total capacity that India's largest power producer NTPC fields today.

If this isn't enough, Anadarko Petroleum, Videocon's partner and operator in the Rovuma I block, has already set the bar higher. "The current upside for total gas in place for the discovered reservoirs on the block is approaching 100 tcf," its boss Al Walker declares.

<B>The great gamble</B><BR>

Videocon Industries Chairman, Venugopal Dhoot, was busy chasing the Korean chaebols and Japanese technology giants in the Indian consumer durables market when he decided to plunge into the deep waters for an oil odyssey.

Did he ever imagine his biggest business gamble would pay him off like this? "We have a risk-taking entrepreneurial approach to business," says Dhoot.

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In just three years, the value of his Mozambique investments has gone up ten times to $2 billion and this is just a teaser to what lies ahead.

A bidding war for Cove Energy's coveted 8.5 per cent stake in the same block is already underway, significantly impacting the valuations of the other partners.

"None of the industrialists who have made bulge-bracket investments abroad will make the returns we will make," says Dhoot from his Fort House headquarters in downtown Mumbai. Going by the results from just one-third the area in the north, we can expect even better results when we start concentrating on the south," he adds.

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His business model is simple: Partner with the best in class in global consortiums.

His past working relationships have resulted in alliances with BPCL and Anadarko, one of the world's largest independent oil and gas explorer, through the world, from Mozambique to Brazil to Indonesia. 

"We are explorers by heart. We don't buy reserves. We love to go to places where nothing much has been done and where you have wild cat wells with no data and history. We like to do our own exploration and not buy oil reserves. It's a very high reward," adds Saurabh Dhoot, who has joined his uncle's energy quest in the family business.

"We bring to the table our geosciences work done by a 30-member strong team of extraordinary scientists."  

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The approach has worked like a dream. Last year, it resulted in spectacular results: Of the 14 wells in Mozambique that were drilled, 12 were successful.

There have been seven discoveries in Mozambique, two in Brazil and one in Indonesia. And the way things are going, Mozambique can become the third-largest global LNG producer, after Australia and Qatar.

Wary markets

But why then is the market undervaluing Videocon so much? Equity investors remain wary and unconvinced about Videocon's governance record. Most analysts do not track the conglomerate or have stopped coverage. Even after the recent news flow, most analysts only maintained "a bullish stance" on BPCL's E&P assets.

"We increase our E&P valuation to account for the increase in reserves ...The coming year will continue to excite the E&P business," wrote Amit Shah and Sriram Ramesh of BNP Paribas in their last "buy" report on the PSU.

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Videocon's management thinks the breadth of their activities befuddle most. "From consumer durables to telecom, to hydrocarbons and DTH and power, it's a fountainhead of multiple activities in multiple sectors. Therefore, it's very difficult to gauge the upside or downside and attribute the right value," explains Drabu.

"Our combined market cap today is only a billion dollars whereas we believe some of what could be standalone businesses alone should have more than a billion dollars of valuation," explains Drabu. 

With an eye on unlocking value, Videocon is now spinning off its global oil and gas business into a separate entity with plans to list it on the London Stock Exchange.

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<B>A critical stretch</B><BR>

To sustain the momentum and expectations, the next 12 to 24 months will be critical for Videocon and its partners across its E&P portfolio.

"2012 will be a defining year for us in Brazil, We will be drilling eight-nine exploratory wells and the results will prove the potential of the Brazilian blocks," highlights a senior BPCL official, who did not wish to be quoted.

"In the next six quarters till 2013, the drilling programme envisions $1.5 billion of expenditure. Our share of that will be around $750 million. The capex will go up if there are discoveries," explains Videocon's Drabu.   

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"The viability of the Indonesian project will also become clearer by 2013. By then, $3 billion would have already been sunk by all the six consortium partners. Around the same time, the reservoir estimates and appraisals are expected to get independently vetted by global certifiers like DNM. Simultaneously, long-term gas supply contracts are getting stitched up," says one BPCL official.

He adds, "Frantic marketing activities are already underway. Though preliminary, the Japanese, Taiwanese, Indian companies and even the Koreans are negotiating to sign up."

But, Mozambique today has zero infrastructure and will guzzle billions of dollars in both upstream and downstream related investments, currently pegged at $18 billion.

So far, these investments include well-drilling, platforms, pipelines, and a natural gas liquefaction plant with facilities to compress and purify. At least two to four such "LNG trains" of five million tonnes each are being thought of initially, along with a port and a jetty.

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<B>Challenges</B><BR>

There is a flipside to all of this. Most consortium members lack the expertise to handle such massive ramp ups.

"There is no Chevron or a BP here known for building LNG infrastructure. Moreover, in gas you may not get what you see. It's very volatile. See what's ailing KG-D6," warns an investment banker, familiar with the plans.

Moreover, even if Videocon has to pump in a fraction of the initial $20 billion dollars of capex planned across its global portfolio, organising and financing can turn out to be arduous.

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But the management says they have already secured $400-450 million worth of credit lines from Indian lenders to bankroll the projects till 2013.

"Beyond that, we will have to raise separate debt," admits Drabu. "But the current value of the stake in Mozambique alone is far higher than what we need. A listing can also help to raise money."

Most analysts however believe that Videocon is likely to divest its Mozambique stake at least partially when it thinks "there is not much juice left in the block." Bankers talk of a $3-billion offer, which Dhoot apparently rebuffed recently.

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As on December 2011, 11 per cent of Videocon's revenues come from its oil business backed by the Ravva fields in offshore Andhra Pradesh.

Profitability wise, consumer durables even now throw up the maximum cash: it's 2.5 times the Rs 477-crore PBIT of oil. But it's obvious that in just five to six years Videocon's balance sheet will tilt entirely towards the oil and gas business.

Dhoot says he was blessed by the late Dhirubhai Ambani, before diversifying. But whether you call it luck, divine providence or Dhirubhai's benevolent gaze from the heavens, it has meant a stratospheric rise in fortunes for someone who sold just televisions not so long ago.  

<I>(Additional reporting by Kalpana Pathak)</I>