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Balancesheet says finances are in mess. Then why is ONGC in denial?

Shalini Sharma

In the financial year that the HPCL acquisition took place in, ONGC’s borrowings shot up to Rs 25,592 crores from zero in FY2016-17

New Delhi: A statement released by state-run Oil and Natural Gas Corporation (ONGC) on Tuesday seems to be a statement of denial, more than anything else. It has been sent out days after a section of the media carried a report on how the country’s largest oil explorer’s cash reserves had shrunk by a whopping 98 percent between the end of financial year 2017-18 and September 2018. The statement said categorically that the company’s financials were strong and in place. However, a look at the company’s balancesheet (or lack of it) tells a different story.

‘Finances in a state of mess’

A report published by The Print on May 5 said that in the September quarter of 2018, ONGC’s cash and bank balances were at Rs 167 crores, down from Rs 1,013 crore in March 2018 and Rs 9,511 crore in March 2017. The public sector undertaking’s (PSU) “cash and cash equivalents” stood at Rs 7.71 crore in the Q3 of 2018. In FY2017-18, on the other hand, ONGC had reported “cash and cash equivalents” totalling Rs 29.60 crores and other bank balances at Rs 983.10 crores. The sum total of the two stood at Rs 1,012.7 crores.

The acquisition of HPCL by ONGC in January 2018 was a deal that burnt a major hole in the company’s finances. The value of the deal stood at Rs 36,915 crores. The acquisition was part of the government’s effort to meet its disinvestment target for 2018

PSU Watch tried to find out the value of cash reserves in Q3 of FY2018-19, that ended on December 31, 2018, but could not because the financial results put up by ONGC does not include a balancesheet. And the company is yet to announce its Q4 and FY2018-19 results.

ONGC’s borrowings shot up to Rs 25,592 cr from zero

The acquisition of HPCL by ONGC in January 2018 was a deal that burnt a major hole in the company’s finances. The value of the deal stood at Rs 36,915 crores. The acquisition was part of the government’s effort to meet its disinvestment target for the year (Rs 80,000). Eventually, the government ended up exceeding the target by Rs 5,000 crores.

In the year 2017-18, ONGC paid a dividend of Rs 8,470 crores to the government, up from 7,764 crore in 2016-17. Additionally, it also announced a share buyback of around Rs 4,022 crores in December

However, as per data accessed by PSU Watch, in the financial year that the HPCL acquisition took place in, ONGC’s borrowings shot up to Rs 25,592 crores from zero in FY2016-17. In the September quarter of 2018, one of the factors that led to a depletion in the oil explorer’s cash reserves was that it used its accruals to pay off the loan. In this quarter, ONGC’s borrowings nearly halved to Rs 13,994 crores.

Dividends and buybacks

In the year 2017-18, ONGC paid a dividend of Rs 8,470 crores to the government, up from 7,764 crore in 2016-17. Additionally, it also announced a share buyback of around Rs 4,022 crores in December.

What does ONGC have to say about it?

ONGC, on its part, has chosen to defend itself by saying that the reports that have appeared in the media, based on its own balancesheet, do not present a true picture. “ONGC reaffirms that it has strong financials in place to finance projects both ongoing as well as upcoming ones. The company’s operational plans and expenditure thereon has also been in line with its requirement and the news report on its fiscal position is completely out of place. There is no plan or item of expense that had to be deferred due to paucity of funds or resources,” the company said in a statement.

Referring to the acquisition of HPCL, the statement said, “The acquisitions made by ONGC are going to strengthen the company’s growth trajectory. ONGC, on standalone basis, has a very conservative debt-equity ratio which compares favourably with global benchmarks. The rating of the company is also very strong compared with its peers in the industry.”

Why is low cash reserve a matter of concern?

Because oil explorers are involved in a business that is risky in nature, they need ample cash reserves to be able to cover damages, if they occur. “Companies involved in exploration and production typically require some cash for leverage, as it’s a high-risk business. Internationally too, E&P (exploration & production) companies do business mainly on equity and not on debt. Better liquidity also helps in improving the firm’s credit rating internationally at the time of raising funds,” Aloke Kumar Banerjee, former director (finance) at ONGC, was quoted as saying by The Print.