ONGC first gets forced to buy HPCL and now buy its own shares back


This situation has arisen because the government needs to meet its divestment target of Rs 80,000 crore by the end of this fiscal

summary of the borrowings of Oil and Natural Gas Corporation (ONGC) during FY17-18. In FY16-17 they had no borrowings. In fact, during the previous several years they had zero borrowings. This is a cash-rich company because that’s what a Big Oil company is.

But now, they not only have slimmed their coffers but also picked up loans, like people pick-up vegetables during a discount rush. And all that because of some ill-considered decisions taken by our present Central government regarding this PSU company.

The reason ONGC took on debt was for purchasing Hindustan Petroleum Corporation (HPCL) from the government. The government owns both ONGC and HPCL, but it needed money, so it forced ONGC to buy its ownership of HPCL for a whopping Rs 36,000 crore, for which ONGC borrowed about Rs 24,000 crore.

But ONGC is hugely cash-flow positive, and in the first six months after this report, it reduced its debt to just Rs 14,000 crore.

The reason for pointing this sticky situation out is that the Central government recently directed cash-rich state-run companies that have a lot of idle capital, to utilise it by handing out dividends and carrying out buybacks. Why? Because they need to meet their Rs 80,000 crore divestment target.

That means that even ONGC (even after buying HPCL) has to roll out dividends and buybacks. However, considering its current position, ONGC says it can either do a buyback or pay dividends, or better, neither, until the next financial year.

While they are still pleading the Ministry of Finance to exempt dividend, unfortunately, due to pressures from the government, they have agreed to carry out the buyback. The buyback is for 2.34 percent of its shareholders’ capital, which comes to Rs 4,022 crore. The record date set for both is January 4.

Now the question is how is ONGC going to pull this off? Answer: It can’t and it doesn’t have the cash anymore. Not unless ONGC picks up more loans, or reduces its efforts to pay back the loans it currently has.

Can ONGC get cash elsewhere?

First, they can look at the profits that would be generated in Q3 and Q4. They generate a cash profit of over Rs 5,000 crore almost each quarter.

Secondly, ONGC holds around 134 crore shares in IOC and IOC recently declared dividends and buyback. If you look at only the dividend aspect, IOC will pay Rs 6.75 per share. For ONGC that means around Rs 903 crore. Then there’s the buyback as well.

The IOC buyback is for about 3 percent of its shares at Rs 149. Assuming ONGC sells back 3 percent of its holding to IOC, that’s 3 percent of 134 crore shares or 4 crore shares at Rs 149. This is about Rs 600 crore.

Finally, ONGC has received $32 million from PDVSA, as part settlement of outstanding dividend payments (ONGC owns 40 percent stake in Venezuela’s San Cristobal project). Assuming $1 = Rs 70, this comes to Rs 224 crore.

So, they get about Rs 1,700 crore from dividends/buybacks of their holdings. That provides them with about 40 percent of what they need for the buyback, and the rest (of the Rs 4,022 crore) will have to be sequestered from their profits of the two quarters.

Their goal of being debt free may have to wait. They were supposed to pay back the entire loan they took to buy HPCL within a year. But that may extend another six months if it has to do this buyback and pay a dividend.

All in all ONGC seems to be in a tough (but not impossible) situation. They generate enough cash to be able to pull it off.

The problem, however, is that the government as the primary shareholder gets in the way of efficient functioning. We could analyse this and say ONGC has the money for now, but what if the greedy government keeps wanting more? As a shareholder, this might not be exciting.

It also tells you the perils of investing in a government-owned company, but at least they siphon off the money after telling you about it. In most other companies, you don’t even get to know about how much money’s been looted.

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