The explorer plans to convert Rs 5,700 crore worth of its unfunded liabilities, including leave encashment and post-retirement benefit liabilities, into funded liabilities, a move that executives explained will mean an outgo of cash since the money will be deposited in a separate corpus. However, Banerjee pointed out the move would also fetch the firm tax benefits since the leave encashment account with LIC would, for instance, help it earn tax-free interest.
Banerjee said the final cash balances would also depend on prices of crude oil as also currency movements, given these determine how much ONGC realises through crude oil sales. The finance director said the final capex number would be crystallised soon.
Given the oil and gas explorer needs to help subsidise oil marketing companies, its internal generations are expected to fall around R2,000-3,000 crore short of its capex requirements of R31,500 crore. ONGC has planned to spend R35,000 crore in 2013-14 on capital expenditure; in the past, the explorer has typically met 90% of its annual targets.
ONGCs decision to provide for unfunded liabilities will reveal its true cash balances, in some senses now inflated. However, smaller cash reserves will hit ambitious exploration plans entailing an investment of R1.64 lakh crore in the 12th Plan period of 2012-17. Chairman Sudhir Vasudeva had hinted in a recent interview to FE that his firm may need to borrow if the subsidy burden is not reduced.
In mid-November, analysts had pared their earnings per share estimates for FY14 to R32.10 after the September quarter Ebitda of R12,100 crore missed estimates following weaker-than-expected net realisations at $2.40 per barrel. In the first quarter of the current fiscal, ONGC had reported a sharp drop in Ebitda to R8,490 crore, down 24% year-on-year, led by higher other expenditure of R4,580 crore and higher staff costs at R590 crore.
The company accounted for a one-off provision of Rs 1,200 crore for the conversion of post-retirement benefit scheme from the defined benefit scheme to the defined contributory scheme.
The stock has been an underperformer for the better part of the last 12 months relative to the Sensex, with the Street concerned about the oil majors contribution to under-recoveries of oil marketing firms. ONGCs share of under-recoveries in the first half of the fiscal was Rs 26,400 crore or around 43% of the total of Rs 60,900 crore. Over the last 10 years it has contributed over Rs 2.3 lakh crore to the subsidy bill. Analysts have pencilled in a subsidy burden of Rs 54,800 crore for FY14, and Rs 56,100 crore for FY15.
Currently ONGC offers oil retailers a discount of $63 per barrel on crude oil sold to oil retailers IOC, BPCL and HPCL for selling diesel, kerosene and LPG at discounted levels. The government compensates retailers for the remaining under-recovery that retailers incur. Over the last two quarters the company has had an average realisation of around $42 per barrel, leaving it with little profits on its oil business where the cost of production stands at around $ 40 per barrel. The three PSU companies ONGC, OIL and GAIL compensate the oil retailers for selling diesel, kerosene and LPG at discounted prices. However, GAIL has now been exempted from contributing in the last two quarters of FY14 as it is not an upstream player.
The oil ministry is currently studying options to reduce the ONGC subsidy burden that is impacting the companys exploration plans. We want to reduce the subsidy burden on ONGC otherwise this will impact its exploration plans. At present we are considering the recommendations made by the Parikh committee as well as ONGCs own proposal on reducing the subsidy burden. Obviously we will need the approval of the finance ministry as well, said an oil ministry official.
ONGCs leave encashment liabilities, currently at around Rs 2,000 crore, will be handled by an LIC group scheme. Leave encashment is calculated annually and was so far being managed internally. Also, in line with the department of public enterprises guidelines, ONGC will transfer its unfunded post-retirement benefit liabilities of Rs 3,700 crore to a post-retirement benefit scheme trust. The company received board approval earlier this year for creating this trust to handle the post-retirement funds.