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 GOV­ERN­MENT'S DIS­IN­VEST­MENT TAR­GET. CAN IN­CREASE IN CRUDE OIL PRICES RE­BUILD MAR­KET SEN­TI­MENT?

Business Today - - BT 500 - By Anilesh S. Ma­ha­jan

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 ` 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 ` 80,000 crore for 2018/19, has sent buy­back dik­tats to Oil In­dia and In­dian Oil too from where it aims to raise ` 1,100 crore and ` 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 re

serves 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 ` 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 ` 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 ` 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 ` 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 ` 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 com- pany 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 ` 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 ` 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 ` 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 ` 6,357.07 crore. This might come as a big re­lief to the oil gi­ant.

SHASHI SHANKAR Chair­man and Manag­ing Di­rec­tor, ONGC

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