Business Today

Paying The Price

The oil explorer burnt cash to buy HPCL, pay large dividend and is now being pushed for a share buyback to help meet the governments disinvestment target. Can increase in crude oil prices rebuild market sentiment?
Anilesh S. Mahajan   New Delhi     Print Edition: November 18, 2018
Paying The Price
Shashi Shankar, Chairman and Managing Director, ONGC

In Mid-september, the Department of Investment and Public Assets Management, or DIPAM, asked ONGC to buy back government shares by the end of November. The government is looking to earn Rs 4,800 crore from this financial jugglery. But this has made the management as well as investors jittery.

The government owns a 67.45 per cent stake in ONGC. Earlier, DIPAM had toyed with an idea of selling a 5 per cent equity in stock markets, but later realised that a buyback might get it more money than what hard-nosed investors would pay. DIPAM, worried over the stiff disinvestment target of Rs 80,000 crore for 2018/19, has sent buyback diktats to Oil India and Indian Oil too from where it aims to raise Rs 1,100 crore and Rs 4,000 crore, respectively. DIPAM officials say buybacks will get them a higher than market price for these shares.

The officials are not wrong as investor interest in oil companies has been tepid over the last year or so. Apart from volatile crude oil prices and geo-political situation and push towards adoption of cleaner energy, there is fear about the government dipping into PSU cash reserves to meet its revenue goals in an election year. ONGC shares have fallen 6 per cent so far this year. During the period under the BT 500 study, too, its average market cap fell 1.4 per cent, making it the only company in the top 10 to record a fall in market cap during the period. And this in spite of the company posting an 11 per cent rise in profit to Rs 19,945 crore in 2017/18. In the two fiscal years, its net realisation per barrel has risen from $54.91 to $66.71. Though these numbers will improve further as crude oil prices rise above $80 a barrel, investors are not enthused. Other than the vanishing cash, thanks to the Centre's disinvestment short-cuts, investors are also worried that the government, in view of the coming elections, may ask oil companies to subsidise consumers. A hint of this came in the first week of October when Finance Minister Arun Jaitley announced that oil marketing companies would cut petrol prices by Rs 1 a litre to cushion consumers from the impact of rising fuel prices. Though some ministers assured markets that oil pricing reforms will not be rolled back, investors are not convinced.

Troubled Waters

ONGC, along with its foreign arm, OVL, has planned a capital expenditure of Rs 38,000 crore for exploration and production. The main focus is on bringing the prized gas block in the Krishna Godavari basin off the coast of Andhra Pradesh into production. This block is known as KG-DWN-98/2 or KG-D5 (adjacent to Reliance Industries-BP's iconic KG-D6). In April this year, the company completed drilling of the first of the planned 34 wells. ONGC expects the project to produce 25 million tonnes of oil and 45 billion cubic metres of gas with peak daily production of 78,000 barrels of oil and 15 million standard cubic meters of gas. It is targeting start of production by the end of 2019 and oil a year later. The Prime Minister's Office, or PMO, is directly monitoring the progress of the project. "This is an ambitious plan, but there are other investments too, for example at Mumbai High," says a top ONGC official. "After four years, crude oil prices reached $80 a barrel, and this was a good time to bring our wells into production." The PMO is pushing oil companies to increase production and reduce oil imports by 10 per cent by 2022. In 2017/18, the company drilled 503 wells, the most in the last 27 years. This fiscal, the plan is to drill 535. ONGC requires Rs 17,600 crore for this, but cash crunch may force it to cut corners. The first hint of this came when it changed its plan to buy 50 rigs to replace its ageing fleet and instead floated a tender for 27 rigs at a cost of Rs 3,000-3,500 crore. ONGC needs to replace 67-odd rigs.

ONGC Chairman and Managing Director Shashi Shankar shared his uneasiness over this and said the company needed funds for capital expenditure and buyback. If we go by the company's latest filings with stock markets, the buyback may erode 42 per cent of its total cash and liquid investments. And this may be followed by a demand for dividend. "If the buyback happens, the revenue department must forget the dividend," says another top ONGC official. Last fiscal, ONGC had paid Rs 5,200 crore as dividend. The revenue department in the finance ministry is expecting oil companies to match last year's dividend payouts. With rapidly depleting cash reserves, a net debt of about Rs 14,000 crore is now looking huge. Oil ministry officials have sought the PMO intervention.

Merger/Acquisition

Last financial year, the biggest oil sector story was the details of ONGC buying HPCL. The diktat had came from the top and ONGC had to shell out Rs 36,915 crore to buy the government's 51.11 per cent equity in HPCL. The CMD of HPCL, M.K. Surana, told BT that for all practical purposes his company will continue to be an independent PSU and only the ownership has changed from government to ONGC. The government's disinvestment target was met but other corporate decisions such as appointment of ONGC nominees on the board, along with ONGC CMD as non-executive chairperson, are pending. Moreover, ONGC and HPCL are yet to integrate their operations. Both are present in upstream, refining as well as retail (ONGC has licensed running of retail outlets to subsidiary MRPL). Both are expecting the government to resolve these issues. ONGC is also looking at a major chunk of profits and dividend from HPCL. Last year, HPCL had posted a net profit of Rs 6,357.07 crore. This might come as a big relief to the oil giant.

@anileshmahajan

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