As a M&A partner with consulting firm Deloitte India, it is Kalpana Jain’s job to play the broker, friend and philosopher to buyers and sellers in India’s energy assets world.
DNA’s Sreejiraj Eluvangal caught up with the senior director to get a sense of where the once hot oil and gas merger and acquisition market is heading.
It has been quite placid in the oil and gas world for some time, at least judging by depressed level of asset sales happening. What is happening, especially with Indian companies?
In the last spring, all companies expanded their asset portfolios and a lot of investments were at the exploration stage. There was this huge rush to acquire assets, even at a very very early stage. The way the oil prices were going, it seemed to be the most meaningful thing to do. When the prices dropped, the same companies, particularly the smaller ones who perhaps overextended their balance sheets, have found themselves in a difficult situation.
For example, if you have ten blocks to explore and develop, earlier you could raise debt. Today, it is not half as easy. Now, out of the ten blocks you want to explore and develop at least three. ‘Let me raise the capital out of the remaining seven to develop the three’.
This kind of consolidation is happening. At the same time, this is not to say that there are large companies willing to drop their money into any asset. They have their own compulsions and they are looking for assets that are near cash or in cash.
What about state-owned companies? They are buying, but how many of them are interested in exploration assets?
I cannot comment on global players, but, for my Indian clients, whether they are government-owned or independent, they are all looking to invest in assets that have cash-generating possibilities much sooner than before. They don’t have the bandwidth. They also want to rebalance their portfolio, they have a lot of exploration assets already.
But there are not that many small, private Indian explorers in India..?
There aren’t if you are talking about Indian companies holding exploration acreages in India, but there are lots of 100-200 million dollar companies holding blocks overseas. So, very discreetly, they have come and told us that ‘these are the properties that we have, please let us know if there are buyers for two out of these or three out of these’. Even the largest private oil explorers in India are today open to arrangements to bring partners or divest a part of their holding or farm out some of their acreages.
Are public sector units willing to put in money now?
In a good asset, yes. According to my discussions with state-owned companies in India, they are much more willing to form partnerships with independent [private] firms than before.
Why? Because in technology, particularly in deep-sea, they are not as good as independent oil companies.So currently we have a state-owned oil company in talks with a private player [in India] to farm out [take on] some of their assets. This is happening more in the blocks handed out before the NELP era [1999].
Do you believe that Indian companies, especially public sector ones, have failed miserably to compete with China in acquiring assets abroad?
I don’t want to comment on success or failure, but yes, they have not been as aggressive as the Chinese ones. It has to do with the fact that India is a democracy and China is an autocracy. They are single-minded about it whereas our companies have to answer a hundred questions. A decision to be taken in this country, at an NOC [national oil company] level, is a very tough job. I have had cases where an NOC has told me, ‘you go and do the due diligence on an asset. The director of the company cannot travel because somebody from the ministry is traveling [abroad].’ They did not bid for the transaction because they just could not go.
Do you expect to see private sector participation go up?
What the $140 oil price did was it got a lot of people interested in exploration. Some of these were people who had been with PSUs for a long time and had decided to get together and were backed by private equity and others. That market is no longer there. So if there were 100 companies interested, today 70 have gone away. But it’s still good because earlier there were only 5.
What is Deloitte saying about the economic recovery and oil prices?
We are saying that a W-shaped recovery is most likely. As of now, things are looking up. But we have also had a strong stimulus effect and when it wears off, we will see the real shape [of the recovery]. It is difficult to predict, but our takeaway is that it seems to be a W-shaped recovery with one more dip in store.
It is difficult to predict crude prices, but what we are saying is that about $80 is what is sustainable for the global economy. Beyond $80, it has implications for demand, for production economics… It will start affecting the growth pattern of the global economy in a fundamental way.
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