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Acquisition, capex plans in FY18 may squeeze ONGC’s cash reserves

LiveMint logoLiveMint 20-07-2017 Kalpana Pathak

Mumbai: Large acquisitions and capital expenditure lined up for this financial year are expected to squeeze cash reserves and drive up debt at state-owned Oil and Natural Gas Corp. Ltd (ONGC).

The government has directed ONGC to acquire 51% stake in Hindustan Petroleum Corp. Ltd (HPCL), another state-owned company, which may have to be followed by an open offer to buy additional shares.

ONGC is also buying a majority stake in a gas block from Gujarat State Petronet Corp. Ltd (GSPC). Raising resources for these deals will stretch the balance sheet of the company, which already has a large capital expenditure plan.

An ONGC official, who spoke on condition of anonymity said government decisions were hurting its performance.

“Either we are paying subsidies or meeting some other government demand. There is also pressure on us to produce more, but this when we don’t receive the market price for our hydrocarbon produce. The new gas pricing regime has meant a drop of more than 50% in gas price to $2.48 per million British thermal unit, significantly lower than our cost of production,” the official said.

ONGC had cash reserves of Rs13,013.64 crore at the end of March, and debt of Rs46,300 crore. It has a capex plan of Rs30,000 crore for 2017-18. The 80% stake in GSPC’s Deen Dayal block in the Krishna Godavari basin is expected to cost Rs8,100 crore. ONGC expects to complete this deal shortly. 

A 13 July Kotak Institutional Equities report said, “Our pro forma calculations suggest that ONGC’s consolidated net debt of Rs46,300 crore as of March 31, 2018 will increase to a significant Rs1 lakh crore in the scenario of buying majority stake in HPCL at 50% premium purchase price, along with open offer to minorities and stake sale in IOCL (Indian Oil Corp. Ltd). The debt may be lower at Rs64,500 crore only if transaction is done at current market price without an open offer. ONGC’s consolidated return on equity will increase marginally, inadequate for the significant increase in leverage on the balance sheet.” ONGC did not reply to an email seeking comments on Friday. 

An investment banker who works with ONGC said the HPCL deal will certainly hurt its balance sheet. “Though its Ebitda (earnings before interest, taxes, depreciation and amortization) is Rs20,000-crore plus and it will not face any concerns in raising funds from the market, a burgeoning debt is always a concern for any company,” the investment banker said, requesting anonymity. The Kotak Institutional Equities note said ONGC may have to spend Rs63,500 crore for buying a 77.1% stake in HPCL, including 51.1% from the government and 26% for an open offer, at a 50% premium to current market price as compared to earlier calculation of Rs28,000 crore for buying 51.1% stake at current market price without an open offer. “ONGC may partly fund either transactions through the sale of 13.8% stake in IOCL, which is worth Rs26,000 crore at current market price,” it added.

On Wednesday, the ONGC stock rose 0.8% to Rs163.05 on BSE, while the Sensex gained 0.77% to 31,955.35 points.

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