ONGC turns funds seeker as cash dries

New Delhi: Just when India’s biggest oil and gas explorer needs to find new reserves to replace aging wells, it’s running out of money.

“Depleting cash reserves are a serious concern,” Oil and Natural Gas Corp.
(ONGC) chairman Dinesh Kumar Sarraf said in an interview on 30 April. “But that doesn’t stop us from drilling more wells. As a loan-free company, we have lots of options.”

Oil’s 36% plunge since June has lowered the valuation of global energy assets, paving the way for takeovers in the sector. State-run ONGC’s $3.3 billion of record cash reserves have all but vanished in the last three years, making it more difficult to compete for acquisitions with rivals such as Royal Dutch Shell Plc and Total SA that are as much as 14 times its size.

“There’s very little option but to lose the zero-debt tag,” said Dhaval Joshi of Emkay Global Financial Services Ltd. “ONGC has to raise loans if it has to complete the kind of investment being planned for the year.”

Shell’s $70 billion move for BG Group Plc could trigger a wave of industry transactions, analysts have said. Total said last month it may use crude’s slump to make acquisitions that builds on its strengths in deepwater offshore fields and liquefied natural gas.

Championing prime minister Narendra Modi’s quest for India’s energy security, New Delhi-based ONGC and its units plan to spend $173 billion in the next 15 years. About $5.5 billion will be spent in the year ending 31 March, with one-third earmarked for drilling new wells and raising output.

Peak production

ONGC currently pumps oil from 350 fields in India. Fifteen of those, accounting for almost three-quarters of the daily total average of 445,200 barrels, have crossed their peak production level, exploration director Ajay Kumar Dwivedi said last month.

The company plans to spend more than $6 billion to develop part of the KG-DWN-98/2 block that lies adjacent to Reliance Industries Ltd’s KG-D6 block in the Bay of Bengal, Sarraf said last month.

“There will be significant requirement of funds for the KG development,” said Aloke Kumar Banerjee, who retired as ONGC’s finance director on 30 April. “The company may have to raise debt for that unless some alternate plans are put in place.”

ONGC’s cash in hand rose more than five times in seven years to touch 210 billion rupees on 31March 2012. It fell below ₹ 1,000 crore as of 31 March, Sarraf said. The lowest cash reserve since 2001 has pushed ONGC toward borrowings that will drain earnings at a time when income from crude oil, its main product, has dwindled.

Brent’s slump

Brent crude’s slump to $68.30 a barrel as of Wednesday has narrowed profit margins at New Delhi-based ONGC. An 8% reduction in the regulated price of natural gas in India is also eating into earnings. An increase of a dollar in the price of gas lifts the explorer’s annual profit by ₹ 2,350 crore, Sarraf said in October.

ONGC’s cash hoard eroded over the past three years after the government asked it to increase subsidy payments to state- run oil refiners including Indian Oil Corp. to compensate them for selling some fuels below market rates. The company, owned 69 percent by the government, paid ₹ 36,300 crore as subsidy during the first nine months of the year ended 31 March, more than double its profit for the period.

It has paid a dividend of ₹ 7,740 crore so far for the year ended 31 March. Fourth-quarter results are scheduled to be announced on 28 May.

‘Aggravate sentiment’

“ONGC’s surplus cash has been sucked out by the government either in the form subsidy or dividend payments,” said Joshi. “Any debt will further aggravate the sentiment and the stock could take a beating.”

The shares have declined 3.9% this year, compared with a 2.8% drop in the benchmark S&P BSE Sensex. The stock closed at ₹ 327.90 on Wednesday, down 4.2%.

Set up in 1994 as India’s first step toward self-reliance in oil, ONGC is the nation’s most profitable company. It has relied on its own cash to fund exploration for at least a decade and has provided loans or stood guarantee when units including ONGC Videsh Ltd raised funds for overseas acquisitions.

“Liquidity should never be a problem for ONGC and they should leverage the market,” said R.S. Sharma, who was chairman from 2006 to 2011. “It should raise loans for development projects where returns are guaranteed.” Bloomberg