GVK Power and Infrastructure Ltd, which owns seven oil and gas blocks off the western coast of India, and its partner BHP Billiton Ltd, may sell a part of their stakes in them to another company, three persons familiar with the plans said.
Two GVK officials and an investment banker, who specializes in oil and gas transactions, said the Hyderabad-based energy and infrastructure company and its Australian partner may look for an investor to garner additional funds for expansion of the oil and gas business. None of them wanted to be identified.
GVK is the main investor in these blocks with a 74% stake, while BHP Billiton holds the rest and functions as an operator of the deepwater blocks, which were secured in the seventh round of auctions under the new exploration and licensing policy in 2008.
One of the GVK executives said his company was definitely looking at the possibility of raising funds by inducting a partner, but “it was too early to comment on it”.
“Certainly, GVK is in the market for inducting a financial investor as it needs more money to develop these blocks,” the investment banker said. “The balance sheet of the GVK group is stretched as it raised debt for other infrastructure verticals, including developing airports.”
GVK Power and Infrastructure had a consolidated debt of Rs.5,548.37 crore on its books as on 31 March, around 25% higher than a year earlier.
In a May investor presentation on its website, GVK said the estimated capital outlay for developing these seven blocks over the next two years was Rs.220 crore.
On Monday, GVK group chairman and managing director G.V.K. Reddy told reporters in Hyderabad that a road map for the development of the group’s oil and gas business will soon be drawn up along with BHP. A meeting that will work towards this has also been scheduled for next week, he had said.
According to a 16 July research report by JPMorgan, GVK will also need substantial additional funds to support growth plans, most notably in developing airports and power projects.
“GVK seems to be stretching its growth aspirations beyond what the balance sheet can support,” analysts Shilpa Krishnan, Sumit Kishore and Deepika Belani said in the report. It estimated an equity requirement of around $1.6 billion (Rs.7,100 crore today) if the company was to go ahead with pursuing all the projects on its radar.
GVK Power and Infrastructure fell 0.86% to Rs.17.35 on BSE on Thursday. The benchmark Sensex shed 1.38%.
Over the last year, GVK Power and Infrastructure, like many other infrastructure stocks, has come under pressure, having lost 60.11% of its market capitalization, while the Sensex lost 2.88%.
The banker mentioned earlier added that BHP may also look to exit at least a part of its holding along with GVK, in favour of a domestic or international partner for its offshore energy exploration business.
Asked if BHP will look to exit its investment in these seven oil and gas blocks partly or completely, Rajnish Gupta, country manager (India) at BHP Billiton, said in an email: “BHP Billiton currently holds interests in 10 blocks off the west coast of India and we are currently assessing the seismic data from our recent surveys.”
Apart from the assets under its partnership with GVK, BHP has a 100% interest in three other blocks in India.
Analysts said such so-called “farm-out” transactions are usual once an asset has been secured and some geological work to assess potential reserves has been undertaken.
“It is relatively less expensive to conduct seismic studies to assess the potential reserves,” said a Mumbai-based oil and gas analyst with a foreign brokerage. “If, based on the geological data, BHP and GVK are convinced about the potential reserves and have decided to drill more wells than their original commitment, they might look to bring in an investor for more funds.”
He did not want to be named as he is not authorized to speak to the media.
While BHP might not face a problem in pumping in the additional capital required, GVK may need to sell a part of its stake to meet its commitment of funds, he said.
Another oil and gas analyst with a Mumbai-based brokerage said it was possible that GVK and BHP were looking to sell a part of their stakes as the response from the initial study may not have been too encouraging.
“Lots of companies bid for deepwater assets hoping to taste success similar to that at KG D6 (the Reliance Industries Ltd-operated block that is India’s largest gas find),” the analyst said. He, too, did not want to be named. “They committed capital and time to develop these assets, but the results may not have been too positive. As a result, if there is a buyer, they may look to get out.”
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