Indian Oil CFO Says Yield Decline Will Boost Competitiveness: India Credit

Indian Oil Corp., the country’s biggest state refiner, is winning the confidence of bond investors it needs to buy energy resources and power the world’s third fastest growing major economy.

The yield on New Delhi-based Indian Oil’s $500 million of notes due in 2015 has tumbled to 2.9 percent since they were issued in January at 4.82 percent. That’s a bigger drop than the 1.04 percentage-point decline in the yield on 2013 bonds of Cnooc Ltd., China’s biggest offshore oil and gas explorer.

“Indian oil companies are looking for assets and lower borrowing costs help raise the money and make us competitive,” Serangulam V. Narasimhan, Indian Oil’s finance director, said in an interview yesterday. “We can go anytime overseas to raise money. There is a lot of appetite.”

Lower funding costs would help Indian companies compete for overseas purchases, challenging China as the two nations scour the world for energy assets. Reliance Industries Ltd. is selling bonds this week, while Oil & Natural Gas Corp. plans to borrow $10 billion over a decade for acquisitions, taking advantage of record global demand for Indian assets.

“India will become more aggressive in acquisitions overseas as the economy continues to grow,” said Dharmakirti Joshi, chief economist at Mumbai-based Crisil Ltd., the Indian unit of Standard & Poor’s. “Cheaper debt can give Indian companies that advantage and make them more aggressive in buying assets.”

Reliance Borrowing

India has lost out to Chinese competitors, which can get loans at discounted rates from state-run banks. Cnooc will pay $1.08 billion for a one-third stake in Chesapeake Energy Corp.’s Eagle Ford shale project in Texas, the biggest acquisition of a U.S. oil and gas asset by a Chinese company, according to company statements.

Reliance was reviewing the assets and considered investing, three people with direct knowledge of the matter said Sept. 17. They declined to be identified because the deliberations weren’t announced.

Reliance, controlled by Mukesh Ambani, Asia’s richest man, has been more acquisitive this year, spending $3.4 billion to buy three shale gas assets in the U.S. The explorer plans to use proceeds from the sale of dollar-denominated bonds to refinance loans and for investments, Moody’s Investors Service said.

India’s energy use may more than double by 2030 from 2007 to the equivalent of 833 million metric tons of oil, while China’s demand may jump 87 percent to 2.4 billion tons, according to the Paris-based International Energy Agency.

Spurned Bid

Indian Oil and state-run Oil India Ltd. bid to buy Gulfsands Petroleum Plc, a U.K. company with assets in Syria and the Gulf of Mexico, in March at a valuation of about 380 million pounds ($603 million). Gulfsands spurned the offer on March 19, calling it “wholly inadequate.”

Indian Oil plans to buy fields in Africa as part of a $1 billion overseas investment plan, Chairman Brij Mohan Bansal said in July.

State-run Chinese companies spent a record $32 billion last year acquiring energy and resources overseas, versus India’s single $2.1 billion investment by ONGC, the nation’s biggest energy explorer, to buy Imperial Energy Corp., according to data compiled by Bloomberg.

“We aren’t happy having such low debt and would like to have an optimum mix,” ONGC Chairman R.S. Sharma said in a telephone interview yesterday. “There are no immediate plans to raise money, but at some point of time, we will.”

ONGC may borrow $10 billion over the next decade to purchase assets overseas, Sharma said earlier this year. In September 2009, China National Petroleum Corp. received a $30 billion loan from China Development Bank at a discounted interest rate to buy energy resources, according to a statement from China National.

Rupee Gains

In India’s corporate bond market, the extra yield investors demand to hold five-year company debt instead of similar- maturity government notes has shrunk to 63 basis points from 81 in May, according to data compiled by Bloomberg.

The rupee has gained 4.5 percent this year, closing at 44.515 per dollar yesterday. Inflows of money forced the government to raise its limit on foreign holdings of debt in the currency by 50 percent last month.

The yield on India’s benchmark 10-year bond has climbed 16 basis points this month to 8.01 percent. Similar-maturity bonds yield 3.4 percent in China, 7.34 percent in Russia and 12.16 percent in Brazil.

The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries was at 560 basis points yesterday, the high for the year and up from 374 at the start of 2010.

Uganda Bid

China’s third-largest oil company spent at least $3.8 billion on overseas acquisitions in the past year. State- controlled China Petrochemical Corp. bought a $4.65 billion stake in an oil-sands project in Canada in April.

Uganda may approve Cnooc and Total SA as Tullow Oil Plc’s partners in developing oil projects in the country, Patrick Bitature, chairman of the Uganda Investment Authority, said Oct. 12. The assets include a one-third stake in three blocks in the African nation’s Lake Albert region from Tullow. ONGC jointly bid with Indian Oil and Oil India for the stake and lost out to the Chinese bid, a person familiar with the negotiations said in June, declining to be identified because the talks were private.

Indian Oil plans to sell $2.5 billion of stock to lower debt and fund new plants, Chairman Bansal said this month. Narasimhan said yesterday there’s no timing yet for any possible bond sale, pending the outcome of the stock offering.