Most Profitable India Oil Explorer Seeks Funds as Cash Dries

Updated on

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. Chairman Dinesh Kumar Sarraf said in an interview on April 30. “But that doesn’t stop us from drilling more wells. As a loan-free company, we have lots of options.”

Shares of ONGC fell 2.4 percent to 320.05 rupees at the close in Mumbai. As cash reserves fall to the lowest in more than a decade, the challenge for ONGC would be to expand production while maintaining its position as India’s most profitable company.

“The fall in the shares when crude prices are rising reflects the concern about ONGC’s cash position,” said Dhaval Joshi of Emkay Global Financial Services Ltd. “The feeling is lower cash would restrain it from aggressive expansion.”

Brent crude, which started recovering in January from a six-year low, traded at $68.02 a barrel as of 3.10 p.m. in Singapore on Thursday, up 0.3 percent. Since June, oil has declined 38 percent, lowering the valuation of global energy assets and paving the way for takeovers in the sector.

Cash Vanish

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 bigger rivals such as Royal Dutch Shell Plc and Total SA.

“There’s very little option but to lose the zero-debt tag,” said Joshi. “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 March 31, 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 April 30. “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 March 31, 2012. It fell below 10 billion rupees as of March 31, 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.

Narrow Margins

Oil’s decline in the past year has narrowed profit margins at New Delhi-based ONGC.

An 8 percent 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 23.5 billion rupees ($370 million), 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 363 billion rupees as subsidy during the first nine months of the year ended March 31, more than double its profit for the period.

It has paid a dividend of 77.4 billion rupees so far for the year ended March 31. Fourth-quarter results are scheduled to be announced on May 28.

‘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.”

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.

Crisil Ltd., the Indian unit of Standard & Poor’s, on April 29 re-affirmed its ratings for ONGC Videsh, saying they reflect the “strong operational, management and financial support that OVL receives from its parent.” Crisil, which rated OVL’s outlook stable, said the assessment could be revised to negative in case of reduced support from the parent.

“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.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE