ONGCs cash reserves deplete 24% in FY14, investments to be hit

Written by Siddhartha P Saikia | New Delhi | Updated: May 5 2014, 04:56am hrs
ONGCONGC?s cash reserves stood at a record Rs 25,000 crore at the end of FY11
In line with the trend of the last few years, ONGCs cash reserves depleted by another 24% to around Rs 10,000 crore by the end of FY14 from the level a year ago, sources privy to the matter said. This was even as the state-run firm squeezed capital spending for the year by about 15% from the planned Rs 35,000 crore and just Rs 3,200 crore from the reserves were used for exploration/production expenditure.

The reduction in the cash position was also due to an outgo of Rs 4,000 crore to convert some unfunded liabilities in relation to leave encashment and post-retirement benefits to employees into funded liabilities, the sources added.

ONGCs cash reserves stood at a record Rs 25,000 crore at the end of FY11.

The state-run firm, shouldering much of the responsibility of Indias energy security, has in the last couple of years been very vocal about the subsidy burden on it being backbreaking and increasingly a threat to its exploration plans. Having to make good close to 43-44% of the oil marketing companies under-recoveries, ONGCs net realisation from the principal business of sale of crude oil has hovered around a measly $2-3/barrel in FY14. The company had consistently sought respite from this but a fiscally stressed government could not oblige.

We have done nearly 85-90% of the total capital expenditure programme. Otherwise, the cash balance would have dipped further by R1,500-2,000 crore, a senior official in the company told FE.

ONGC is expected to declare its fourth quarter and annual results by end of this month. The Maharatna company, according to IDFC, might have posted a net profit of R5,554 crore on Ebitda of about R10,9406 crore in last quarter of last fiscal. Flat net realisations and steady production, coupled with lower other expenses imply flat year-on-year PAT. However, accounting for higher Gujarat royalty for the quarter could see earnings come materially below estimates, said IDFC.

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The explorer last year deposited into separate a corpus some Rs 4,000 crore for leave encashment and post-retirement benefits of its employees. ONGC has 33,000 employees.

ONGCs plan is to achieve a capital spend of Rs 1.64 lakh crore during the 12th Five-Year Plan period (2012-17). However, unless the subsidy burden on it comes down (thanks to oil price decontrol and a reduced share of its burden vis-a-vis the budget subsidy), it will have to borrow heavily to meet the capex needs.

In the first nine months of FY14, the firm shelled out Rs 40,182 crore to subsidise government oil marketing companies for selling fuel below market cost. Given that it might pay another Rs 14,000 crore for the fourth quarter, the total subsidy burden on ONGC for the full year would add up to Rs 54,182 crore. It would be nearly 10% more than Rs 49,421 crore it paid last year.

The countrys flagship company ONGC is facing rough weather to sustain output from its existing fields, in addition to monetising new assets. While the oil business is hardly profitable, the present margin of $0.58/million metric British thermal units (mmBtu) from the gas business is not sufficient to support big investments in exploration. (The effective margin after taxes and dividend from gas business is just $0.21/mmBtu).

Now, a silver lining is the expected increase in gas prices as per Rangarajan formula. Petroleum minister Veerappa Moily said last week that the price would come into effect with retrospective validity from April 2014 as soon as the election code of conduct is lifted less than a fortnight from now.

For crude oil sales, the company needs a realisation of $65-70/barrel to keep oil flowing from old fields and develop new ones. But, after sharing subsidy burden (which means giving a discount of over $60/barrel to oil marketing companies), its realisation drops to a little above $40 a barrel. During April-December FY14, ONGC sold every barrel of crude oil produced at an average of $106.7. However, realisation came down to $43.75 a barrel after subsidy share, and considering a cost of $40-41 a barrel, the net realisation is just $2-3/barrel.