Budget 2020

ONGC doubles down on capex to make up for COVID-19 delays

PSU oil explorer sees spending reaching close to ₹32,500-crore target this fiscal

ONGC on Tuesday said capital expenditure during the current fiscal is likely to be close to the ₹32,500-crore target as it is redoubling efforts to make up for the time lost due to the pandemic.

On an investor call, Oil and Natural Gas Corp. (ONGC) Director (Finance) Subhash Kumar said the COVID-19 outbreak and the global restrictions that followed had disrupted the supply chain, hitting project implementation.

Oil and gas exploration and production projects are highly dependent on foreign vendors for the supply of equipment and services. Also, facilities like rigs are operated by foreign crews.

Resumption to aid

However, with the gradual resumption of economic activity globally, ONGC is hopeful of making up for the lost time, Mr. Kumar said.

“We had in April-May recalibrated capex spending to ₹26,000 crore on the assumption of a long-drawn impact of the pandemic on economic activity. But with things opening up, we will be able to achieve spending of close to ₹32,000 crore… maybe ₹29,000 crore to ₹30,000 crore or ₹32,000 crore,” he said.

India’s top oil and gas producer had budgeted ₹32,501 crore of capital expenditure for the year to March 2021.

ONGC has taken up project work on a war footing to meet the capex target.

PSU capex as stimulus

The government is looking at increased public spending to give a boost to the pandemic-hit economy. It is pushing public sector companies to not just meet the stated capital expenditure targets but even go beyond them.

On the capex for the next fiscal, he said ONGC was in the process of recasting the numbers.

“We had projected ₹ 32,000 crore to ₹ 33,000 crore capex for the next fiscal. Post Covid, we have to revisit the numbers. Over the next 15-20 days we will have a clearer view,” he said.

Stating that the company continues to lose money at the current government-mandated gas price of $1.79 per million British thermal unit, he said the company starts making money only if gas prices are above $3.7.

The government, he said, has set up a committee to look into the demand for reviewing the current formula which has made gas production an unviable proposition.

ONGC, however, is not in favour of either floor or cap on gas prices and there is a need for a balance between both.

“We have now rock bottom prices,” he said.

On the outlook for coming quarters, Mr. Kumar said “the worst is behind and things will improve”.

ONGC got $28.72 for every barrel of crude oil it sold in the April-June quarter, which improved to $41.38 in July-September.

“Things can only get better from here. We anticipate second-half performance will be better,” he said.

Commenting on ONGC’s second-quarter earnings, Moody’s Investors Service said despite the recent recovery, crude oil prices remain below fiscal 2020 levels (fiscal year ending March 31, 2020).

“We assume oil prices to average $45 per barrel in 2021 because of low demand and high inventory levels. As such, earnings from sale of crude oil will remain at or near current levels over this period,” it said.

Earnings from gas sales will decline because the Government of India reduced domestic natural gas prices by 25% from October 2020, it said adding lower gas revenue will not have a significant impact on overall revenue as gas contributes only about 20-25% of upstream revenue.

Earnings from the refining segment will recover in subsequent quarters on the back of a recovery in throughput levels. However, it will remain weak compared with previous years because of sustained weakness in refining margins, it said.

Capital spending fell by 7% to ₹19,100 crore during the first six months of fiscal 2021 compared with ₹20,600 crore in the same period last year.

“We expect capital spending to increase in the subsequent quarters as economic activity rebounds following the easing of lockdowns,” Moody’s said.

In addition, shareholder payments are expected to remain in line with historical levels notwithstanding the company’s operating performance as the government, which is the largest shareholder in ONGC, relies on dividends from the company as a source of revenue to meet its fiscal deficit target.

However, the company has not declared any dividend in the current fiscal year.

“An increase in capital spending and shareholder payments during the current low earnings period could translate into an increase in borrowings creating pressure on the rating,” Moody’s said.