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ONGC’s realizations at 5-year low, to hurt investment plans

LiveMint logoLiveMint 26-05-2014 Promit Mukherjee

Mumbai: Oil and Natural Gas Corp. Ltd’s (ONGC) earnings from each barrel of crude oil it sold fell to a five-year low, as the state-run energy explorer’s subsidy obligations rose, threatening the company’s ability to acquire overseas energy assets.

For the year ended 31 March, ONGC has been asked to share 40% of the revenue losses state-run fuel retailers incur on selling diesel, cooking gas and kerosene below the cost of production. ONGC will shell out `56,384.29 crore for the fiscal year as subsidy, a jump of 14% from `49,421 crore in 2012-13, said A.K. Banerjee, director of finance at ONGC. The subsidy share reported by Reuters on 23 May has not been formally announced by the government.

As a result, ONGC’s net realizations will slip further. In FY10, the company reported a net realization of $55.6 per barrel, which fell to $53 per barrel in FY13 and has now fallen to $44 per barrel, the lowest in five years.

“This is the lowest realization per barrel for us at a time when the total under-recovery has reduced by almost `20,000 crore this year. Unfortunately, ONGC doesn’t get any benefit out of this,” Banerjee said in a phone interview on Sunday.

Falling realizations will impact the company’s cash flows and hurt its ability to fund growth of its overseas unit ONGC Videsh Ltd (OVL), which is dependent on the parent company for capital.

“In future, ONGC’s growth will largely come from overseas acquisitions which will be done through OVL and hence ONGC needs to generate and retain its earnings to help its subsidiary to pursue its targets,” said Banerjee.

OVL, which was floated to scout for oil and gas reserves overseas, is targeting to increase production from 7.26 million metric tonnes of oil equivalent (mmtoe) per annum in FY13, to 60 mmtoe per annum by 2030, a jump of over eight times, according to ONGC’s perspective plan 2030 approved by its board in May 2012.

This would require an investment of $20 billion over the next 15 years, according to OVL’s FY13 annual report.

“ONGC Videsh needs to use full headroom of balance sheet of ONGC and ONGC Videsh to finance these acquisitions coupled with equity and project financing,” said the annual report.

Besides direct funding, OVL is also dependent on ONGC for providing guarantees whenever it seeks loans from banks, therefore a healthy balance sheet of ONGC is a must, said Banerjee. OVL is an important part of ONGC’s overall growth strategy, as most overseas acquisition done by the company have been through the overseas subsidiary, said Dhaval Joshi, an analyst with brokerage Emkay Global Financial Services Ltd.

“Although of late, OVL’s internal accruals have increased, it is still dependent on ONGC for cash and guarantees,” said Joshi. So far, ONGC has extended more than `15,000 crore ($2.5 billion at current conversion rate) for OVL’s expansion activities by way of debt and equity, and last year the parent provided a guarantee for OVL’s $2.45 billion buyout of Videocon’s offshore asset stake in Mozambique, according to Banerjee.

The increased share of subsidy being borne by ONGC is also eroding ONGC’s cash reserves which have fallen from a high of `28,684.8 crore in FY12 to `19,584.3 crore in FY13. The cash reserve numbers for FY14 are also expected to be around the same level, when the company announces its results on 29 May.

In a note released by the corporate and investment banking division of Barclays Bank Plc on 24 May, analysts Somshankar Sinha and Pooja Gupta said, “We expect the government to keep the benefit of lower u-r (under-recoveries) for itself in FY15 but we see scope for a change in FY16 that could allow ONGC and Oil India’s oil price realizations to rise.”

Total under-recoveries for the state-controlled fuel retailers—Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd, stood at `1.4 trillion in fiscal year 2013-14, according to Petroleum Planning and Analysis Cell (PPAC)—the statistical entity of the oil ministry. In the previous fiscal, under-recoveries stood at `1.61 trillion. Despite the fall in overall under-recoveries from a year earlier, ONGC has paid more both in absolute terms and in percentage terms.

Banerjee said the government should not treat ONGC as a cash cow and make it pay for the losses of the oil refiners to such an extent, while the government itself reduces its subsidy outgo.

“We should not be the victims of a high fiscal deficit, losses of OMCs (oil marketing companies or fuel retailers) and subsidized fuel in the country,” he said.

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