1. ONGC to raise, not cut, capex amid falling crude oil prices

ONGC to raise, not cut, capex amid falling crude oil prices

At a time when global energy giants are cutting costs on falling crude oil price, state-run ONGC would not reduce any capital expenditure...

By: | New Delhi | Updated: February 5, 2015 5:19 AM

At a time when global energy giants are cutting costs on falling crude oil price, state-run ONGC would not reduce any capital expenditure (capex) programme and rather spend more to ramp up its output.

“We find no reason so far to cut down our capex for 2015-16. Rather, going by the progress of various projects, we, in all probability, will exceed our budget,” Dinesh K Sarraf, chairman and managing director of ONGC, told FE. It intends to spent R36,000 crore in the next fiscal.

Global crude oil prices have fallen more than 60% since June last year. If prices remain at around $55/barrel through 2015, most of the lost revenue will hit exploration and production (E&P) companies’ bottom line, reducing their available cash flow for reinvestment. Oil prices fell on Wednesday as renewed concerns over global demand and high stock levels halted a rally that pushed up prices by about 19% over the past four sessions. Brent was hovering 17 cents lower at $57.74 a barrel on Wednesday afternoon.

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The every year increasing subsidy burden on ONGC is a major concern among investors. In FY14, ONGC suffered highest every oil subsidy bill at R56,384 crore. In the last fiscal, the Maharatna firm sold every barrel of crude oil for $106.72. However, it has to bear a subsidy of $65.75/barrel to compensate state-owned oil marketing companies, leading to a net realisation of just $40.97 a barrel.

“Due to a considerable reduction in international oil prices, coupled with the deregulation of diesel prices by the government, a significant reduction is expected in total under-recoveries. Accordingly, the government is already mulling on a plan of reducing the subsidy burden for upstream companies, and therefore, the sliding oil prices may not affect us. The relief that the government is reaping through falling oil prices, is expected to result in a relief for us,” Sarraf explained.

As regards to financial prudence, even before this slide in crude prices, we started optimising our costs and improving our overall operational efficiencies. The initiatives taken in that directions will help us to take the falling oil prices in stride, the chairman added.

In FY14, ONGC reported a net profit of R22,095 on earnings before interest, taxes, depreciation, and amortisation (Ebitda) of R43,358 crore. It spent R32,309 crore as capex in FY14.

Sarraf said that ONGC has taken up 24 advanced recovery projects, of which 21 have been completed. “Incremental gains of over 87 million tonnes have been made already till FY14, of which 7.46 million tonnes was achieved in FY14 alone. On completion of the remaining ongoing projects, we envisage a total cumulative incremental gain of 170 million tonnes,” he explained.

The biggest exploration company in India saw it standalone crude oil output falling from 24.67 million tonnes in FY10 to 22.25 million tonnes in FY14. Similarly, gas output has increased marginally from 23.11 billion cubic metres in FY10 to 23.28 billion cubic metres in FY14.

Lower oil prices will directly reduce cash flow in 2015 for E&P companies, which will try to offset the shortfall by reducing their capital investments, said Pete Speer, senior vice-president at Moody’s Investors Service.

“The collapse in oil prices in 2014 accelerated in the middle of the E&P companies’ capital budgeting process for 2015. Some companies have already announced cuts, while others, including Chevron, have extended their planning process through early 2015 —b eyond the traditional mid-December completion,” said Speer.

The larger investment-grade E&P companies will likely announce sizeable cuts in capital spending for 2015, in line with ConocoPhillips — the largest independent E&P company with global operations —which has announced a 20% capital spending cut for 2015, to $13.5 billion.

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