ONGC carries subsidy cross on road to loans

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SummaryCash balance low, PSU weighs domestic debt

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 India’s 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, ONGC’s 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 Moody’s, 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.

ONGC’s 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 firm’s 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, ONGC’s share of the burden rose to Rs 12,300 crore or close to 50%

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