It wasn’t too long ago that the state-run oil explorer — Oil and Natural Gas Corporation — was not only debt-free but one of the country’s most profitable and cash-rich firms. Today, however, it is at a critical juncture. Following its acquisition of refiner HPCL and exploration firm GSPC, the explorer has turned itself into a company with a massive debt of more than Rs 25,000 crore as of the end of the last fiscal from a zero-debt firm a year ago. However, the deal has already paid off close to half of that from revenues it generates, ONGC says. Still, it is reeling under a net debt of about Rs 14,000 crore.
In addition, ONGC has recently taken a risk in buying back 25 crore shares for Rs 4,022 crore as part of the government’s plan to get cash-rich PSUs to part with their surplus. While the government stands to benefit most, the plan is set to amplify the explorer’s indebtedness. Worse, this comes at a time when it has a sizable capex plan of about Rs 32,000 crore for FY19, as per its annual report.
The company has also been pressured by the government to pay an interim dividend. “Due to the existing legal framework, ONGC has to finance the buyback through internal resource accruals instead of loans borrowed from banks or financial institutions. Hence, ONGC requires time up to mid-December for arranging internal resources,” the company said in a letter to the Finance Ministry. However, the Committee on Management of Government Investment in Central Public Sector Enterprises refused to exempt ONGC and suggested that the latter could borrow from the market for the purchase.
Last fiscal year, on government instructions, it paid interim dividend twice amounting to 105 per cent or Rs 6,736 crore.In any case, investors have seen value erosion in the stock. Fears that ONGC may have to share subsidy burden of the oil sector has led to underperformance. Sure, with crude oil prices having corrected from their highs in October, there should be some relief, but the picture isn’t rosy.
Analysts at Jefferies India said in a note that even as the liquefied petroleum gas/kerosene under-recoveries have eased, it may still rise 45 per cent year-on-year to Rs 37,000 crore in FY19. “We assume that upstream PSU firms take third of the burden with fiscal space constrained,” it added. As on November 30, ONGC’s market value was 34 per cent below its all-time high annual average of Rs 2,72,663 crore for FY14. At this juncture, a lot depends on the man at the helm, Shashi Shanker, who took over the beleaguered PSU a year ago. It remains to be seen if he can coax it back to health without rocking the boat.