Cairn Finds Oil In KG Basin Amidst The Ongoing Vedanta-Cairn Deal!!


It is now common knowledge that Vedanta has shown keen interest in acquiring Cairn at a hefty price of upto $9.6 billion. There has been lot of commentary on whether this is a right acquisition for Vedanta and the issue has been discussed in detail here highlighting critical reasons as to why the deal may not be a strategic buy after all

However, deal being a strategically beneficial or not, the Vedanta-Cairn has quickly run into troubled waters due to various reasons, the primary being the stake of ONGC in Cairn’s assets.

Cairn came to the center stage when it started pumping crude from its block in Rajasthan which was touted as the first major crude oil discovery since few decades. However, Cairn only holds 70% stake in the Rajasthan Oil block (RJ-ON-90/1) with the other 30% controlled by ONGC. So, Cairn needs approval from ONGC alongside the government before even thinking about selling off.

What is more interesting is the news that Cairn has discovered Oil & Gas in the KG Basin. A flow of 75 barrels per day of oil and .27 million cubic feet per day of gas was achieved at the well. Overall it is a good news since we as a nation could do with as much Oil & Gas we can extract. Given the current situation, I wonder how this news will play out in influencing the Vedanta-Cairn deal

  • Increasing complexity with ONGC as a Stakeholder

    The KG basin block where Cairn has discovered Oil & Gas has ONGC as the major partner with 51% share whereas Cairn has a 49% interest. Now, I have not come across ONGC’s reaction towards the Vedanta-Cairn deal but apparently they would not be interested in having Vedanta take over. With this oil discovery, I only expect things to get murkier as far as ONGC approval is considered

  • A possible increase in valuations

    While the oil discovery may not be a breakthrough in terms of the volume or the possible revenue generation capabilities, it is expected to add some value to the assets of Cairn. Since, the discovery was only announced on Monday there could be a possibility where in the initial price quoted by Vedanta might need an upwards revision. Would Cairn push for an increased price and would Vedanta agree?

The deal value is already pretty high and things have not panned out too well from Vedanta’s perspective. For now, Cairn seems to be having a good ride as far as the stock markets are concerned. On a day when the Sensex shed almost 100 points, Cairn seemed to have held it own closing with a gain of 3% at 354.20

What do you think? Would the recent discovery make things more complicated in the Vedanta-Cairn deal

  1. Altaf Rahman says

    @ Ankit,
    Thanks for the comments. Well madhav is way above my head. His comments are more balanced, beautifully worded, suggestive and more importantly very very polite.
    Now coming to Cairn UK, Cairn India, Vedanta, ONGC, Rajasthan field, the issue gets complicated if we dont understand the holding pattern.

    1) Cairn UK has got nothing to do with Rajasthan Field. Only Cairn India and ONGC own the Field.
    2) Cairn UK selling part of its holding in Cairn India will have no effect on Rajasthan field.

    Where thigs get murky is Vedanta entry into Cairn India.

    Some times I wonder how far anyone can go with “Leveraged buyouts”

    Just imagine.
    Step 1 : You have Rs. 1 Crore. You float a company A by taking 50% shares and other 50% to public. Now company A has cash of Rs. 2 crores (1 crore from you and 1 crore from public).
    Step 2 : Company A floats anotehr company B by taking 50% shares and 50% to public. Now company B has cash of Rs. 4 crores (2 Crores from Company A nad 2 crores from public)
    Step 3 : Extension of step 2 to have a company C with cash of 8 crores.
    Step 4 : Extension of Step 3 to have a company D with cash of 16 crores.

    Now tell me who owns Company D? Ofcourse you with your 1 crore. You play the game so tightly with out a chance for anyone to take over any of the companies A, B, C.

    You can go on and on and finally have company Z with Rs. 1 lakh crores!! Still you can control it with your Rs. 1 crore.

    Now do you think I am joking.

    See the facts yourself !!

    Agarwal owns 57% of vedanta!!
    Now vedanta will own 51% of Cairn India!!
    Cairn India owns 70% of Rajasthan field (and also few more blocks in KG basin and some more in Gujarat/Maharashtra)

    If you work backwards, Agarwals investment in Rajasthan field will be hardly 20% (70% X 51% X 57% = 20%) but he will dominate 100%. This is the beauty of “LEVERAGING”

    Can you see the similarity of my hypothetical case and Agarwal? Its no more hypothetical case. Its real.

    I will really hate if Govt will let Agarwal get away with this loot of national assets.

  2. Altaf Rahman says

    Hello Ankit,
    Nice post, my fav topic.
    You said Rajasthan block is held 30% by ONGC and 70% by Cairn and Cairn need ONGC/Govt approval for sell off.

    I would like to add the following to be very specific.

    1) Rajasthan O&G Block is held by ONGC, Cairn India in the ratio of 30:70.
    2) Cairn India is a public limited company in which Cairn UK holds 62% and the rest is with institutions/public/employees etc.
    3) What is getting sold is not Cairn portion of Rajasthan field. Cairn UK is planning to sell 40-51% (out of its 62% share ) share in Cairn India to Vedanta.
    4) If Cairn India is selling any % out of its 70% then ONGC gets ROFR (Right of First refusal) But Cairn India is not selling any % of the filed. What is being sold is the shares of promoters to anotehr promoter)

    So in light of the above, the sale is not that of Rajasthan Oil block. Its the share holding of promoter in a public limited company. So ONGC does not hold any liverage here.

    However as Operator Ciarn India will have a new boss i.e. Vedanta which will have effect on production, future production so in this angle ONGC has ROFR.

    In any case ONGC/Govt have influence over the transactions. Using this liverage, I feel ONGC should strongly bid for 51% stake in Cairn India.

    I have seen the media is biased towards Vedanta and is spreading false data such as :

    Media Propaganda No 1 : It would cost ONGC 13 billion dollars to buy out Cairns India.
    My question to them is why do ONGC have to buy out Cairn India? ONGC can buy 51% share of Cairn India on same terms of Vedanta deal (by upping price). It would cost same as Vedanta (slightly more but not 13 billion)

    Media propaganda No. 2 : By buying out Cairn India ONGC is not creating any asset as the asset already exist.
    My question is its not the question of creating asset. ONGC being a Public sector company will have higher % of Rajasthan field which is good. ONGC dont have to look to overseas buys when we have an asset locally.

    Media Propaganda No. 3 : They say the bullying will send wrong signal to forign investors that they can invest in India but can not sell freely.
    My answer to them is it will infact send positive signal. They not only can sell but can sell more profitably. (See!! ONGC will up the price for Cairn India share of 355 rupees)

    Media Propaganda No 4: They say GAIL entry into the tie up is a misfit. Gail has no experiance in E&P of Oil. They are experts only in Gas.
    My answer to them is GAIL misfit is 1000 times better than Vedanta fit. Atleast GAIL has expertise in Gas. Vedanta has no expertise at all in O&G.

    Many more Media propaganda going on. I have a feeling Vedanta bosses are influencing media. As soon as ONGC or Govt are looking at a possibility, media is coming out with outrageous propaganda.

    1. Ankit says

      Altaf, I am actually surprised you have interests and knowledge in almost anything and everything that goes on . After Madhav, i think you are the best reader this blog has had :-)

      As for the points you mentioned,

      Agreed that Cairn UK is selling its stake in Indian operations through promoter share. I do not have a lot of understanding on the technicalities but should a stake be sold wouldn’t it involve parting with holding in Rajasthan oil block either through share sales/cash etc.
      ONGC does own the right to refusal and as i mentioned earlier should promoters share be transferred wouldn’t it somehow involve the % that Cairn India owns/operates.
      As for the leverage, as you right pointed out with a new boss ONGC might have issues operating the assets which are jointly owned and operated

      As for the media propoganda i second your thoughts given that Vedanta has the muscle to pull it off.

      For ONGC up-bidding, i guess being a public company it might not come easy for them. Moreover, should a bidding war happen the deal valuation might get more murky.So, i am not sure of the ONGC buying Cairn story

      My idea hinted at the recent oil discovery which might make the valuations tricky no matter who the suitor is.
      At the end like all the big ticket deals, there might be too much dirt under the carpet so only time will tell the true story

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