ONGC carries subsidy cross on road to loans

Written by Pranav Nambiar | New Delhi | Updated: Sep 17 2013, 09:08am hrs
For the first time in 15 years, the once cash-rich Oil and Natural Gas Corporation (ONGC), might be compelled to turn borrower in the home market, as its cash balances run low. Given that its cash balances are fast depleting as it subsidises a higher share of under-recoveries, the public sector giant might have to otherwise abandon its ambitious exploration plans. Cash balances at Indias fourth largest company by market value are down to R7,000 crore (net of unfunded liabilities like pension) from R9,500 crore at the end of FY12 and it will need to dip into these if it is to continue exploration work and meet 90% of its capex target as it typically does. That could leave it with a near-zero cash balance by the end of the fiscal.

If the subsidy burden continues at current levels, we might have to borrow at least R6,000 crore after 7-8 months, our first term borrowing in about 15 years, AK Banerjee, director of finance, ONGC confirmed. Banerjee believes the firm will just about get through 2013-14 on internal accruals but adds that the situation after that looks precarious.

Indeed, ONGCs finances are already somewhat strained, since its internal accruals this year are expected to be much lower at R27,000-28,000 crore post-subsidies, whereas it had hoped to spend close to R35,000 crore on capex.

Given that ONGC has a Baa1 local currency stable rating from Moodys, Banerjee says it should not be difficult to borrow at a good interest rate. Borrowing overseas might not be feasible right now since hedging costs and the weak rupee make this option unviable, he observed, adding things might change by the time the firm hits the market.

ONGCs cash reserves dipped by around R2,500 crore last year since it contributed R49,421 crore or 31% of the total under-recoveries of R1.61 lakh crore. Over the last 10 years, ONGC has contributed about R2.16 lakh crore to under-recoveries.

Otherwise, adjusted for taxes and cess, Banerjee estimates the firms bottom line would have been higher by Rs 1.26 lakh crore.

Upstream companies ONGC, OIL and GAIL compensate oil marketing companies (OMCs) for selling diesel, LPG and kerosene below market prices. The share of ONGC's subsidy burden has risen progressively over the years after the government decided to do away with oil bonds to compensate OMCs. In Q1FY14, ONGCs share of the burden rose to Rs 12,300 crore or close to 50% of total under recoveries, from 31% in 2012-13.

ONGC plans to invest Rs 11 lakh crore towards exploration between now and 2030, but fears these would be impacted by the rising subsidy burden. How will we meet future exploration needs if we need to dip into our cash reserves every year We may also need to contribute to OVL's acquisitions, Banerjee said.

If ONGC's investments are not made as per plan, India could lose 60 MMT of crude production, translating into losses of around Rs 1,75,000 crore, say ONGC officials. The company's oil production has not met targets for five years now.

At present, ONGC gives discounts of $63/barrel to OMCs, leaving the company with a realisation of around $40/barrel ($47 not including condensates). With the costs per barrel (incl taxes) at around $40, the company is virtually making no returns on crude oil sales.

ONGC recently recommended a new subsidy sharing formula to the oil ministry to ensure its exploration were not impacted. We suggested that ONGC must contribute to subsidies only when oil prices are above $65. If the price is $65-$100, the discount should be 85% of the price beyond $65. Further, if oil price increases beyond $100, the discount should be 90% of the price beyond $100, said Banerjee.

In a letter to the Prime Minister on August 30, petroleum minister Veerappa Moily pointed out that the recent weakening of the rupee will take under-recoveries to Rs 1.8 lakh crore in 2013-14, compared with about Rs 1.6 lakh crore in 2012-13. A Macquarie research report, however, notes that despite the sharp rupee depreciation, Indias overall oil subsidy will fall to Rs 1.3 lakh crore given the easing in crude prices, hike in diesel prices resulting and fall in demand growth.

Analysts Sumit Pokharna, research analyst (oil & gas) at Kotak Securities, said that though the company has time and again raised overseas debt for its international arm ONGC Videsh, domestic operations have generated sufficient internal accruals to meet exploration needs.

However, with little chance of subsidy relaxation for ONGC with the elections round the corner, the company will soon have to borrow for domestic exploration, he said. The long-term debt for the group as a whole stands at around Rs 8,840 crore.