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Exclusive Interview for Petrotech 2012 OIL to spend INR 7,000 crore on acquiring assets, companies, T K Ananth Kumar, Director (Finance), OIL India Limited

15 Oct 2012

Oil India Limited (OIL) is one of the few PSUs in the country today having a surplus cash reserve position. With more than half of its oil and gas producing assets aging, the company has spelt out a clear roadmap for an acquisition-triggered growth over the next 10 years. The biggest stumbling block for the company at present, however, is the confusion over the subsidy sharing mechanism which is denting its net profits. OIL’s Director (Finance) T K Ananth Kumar talks to Neeraj Dhankher on how the oil major is poised for remarkable growth through acquisition and selective diversification. Excerpts:

What are your acquisition plans for 2012-13?

We got our acquisition strategy worked out by an international consultant which has been reviewed and accepted by our board. There is no hard and fast rule regarding any specific region, but regions like the US, Canada, Australia, parts of Africa and even South-East Asia are the ones we prefer. But finally everything depends on prospects, due diligence as well as economic return.

In spite of 50 per cent aging and depletion in North-east fields, we have been able to increase production over the last four years and are confident of sustaining the growth. So from organic growth point of view, we have been doing quite well, with growth in crude oil and gas. At the same time, as we have good technical experience and sound financial strength, there is a need to supplement organic growth with inorganic growth through acquisition of discovered, developed or producing property and we are working seriously on it.

This year we have earmarked about INR 7,000 crore towards acquiring assets or companies with producing assets. These would predominantly be oil and gas assets, but considering the potential for long-term scope for shale oil, shale gas, CBM etc, we are also keen to enter into these areas.

In medium term, out of the INR 20,000 crore planned to be spent in the next four years; about 25 per cent to 30 per cent would be on acquisitions. We can also go for loan, because we are a debt free company, to supplement our acquisition. It depends on the opportunity, prospects and economics. Fund is not a big constraint for us.

We are working towards announcing a couple of acquisitions this year.

What is your cash reserve position?

We have close to INR 13,500 crore--almost $2.4 billion—and we have adequate investment plans for the use of this cash in E&P, acquisition of assets, some unconventional areas and certain selective diversification in oil and gas value chain. We have drawn a detailed strategic plan for next ten years where organic, inorganic growth and diversification have been very well laid out. OIL has plans to spend more than more than INR 20,000 crore in next four years. So we certainly feel that the cash we have in hand would be utilised gainfully.

Out of this INR 20,000 crore, diversification would not be the major element of expenditure. We are an exploration company, so we want to have our focus on E&P, but selective diversification in value addition and earmarking about 25 per cent of our funds for this purpose is our strategy. But majority of investment would be on our core business.

When is 10 per cent of OIL equity going to be divested? What is the asking price likely to be?

As far as we know, OIL would not be subject to FPO. However, we have been hearing that OIL disinvestment would be taken up through offer for sale route where government would like to sell its stake in the market through offer for sale. We are expecting the sale to take place in 2012-13.

With sale of another 10 per cent stake in OIL, government’s share would come down from 78.4 per cent to 68.4 per cent. We have a market capitalization of about INR 30,000 crore and we expect a good price for the sale. But the exact price at which the government would like to sell would be decided by the Empowered Group of Ministers.

What is OIL’s Capex for 2012-13 and how do you plan to spend it?

We have lined up INR 3,378 crore, excluding acquisition which is at INR 7,000 crore. Bulk of the expenditure shall be on exploration, development, purchase of capital equipment and also in the overseas blocks already acquired. In short, it would be spent on organic growth as well as on exploration blocks we have apart from acquisition of assets.

Increasing global crude price is seen as a good sign for upstream companies. How does the recent surge in global crude price, coupled with rupee devaluation, impact your bottom line?

There is no absolute correlation between increase in crude price and higher net realisations. The subsidy shareout, exchange rate, cost of operations etc. play a vital role. Last year, the rupee depreciated by 20 per cent over 2010-11.  In spite of higher subsidy share by OIL, the dollar-rupee exchange being adverse, we saw a 21 per cent improvement in bottom line in rupee terms although in dollar terms the net realisation was flat. 

In Q1, 2012-13, realisation has not been very encouraging in dollar terms. We have the same problem of higher subsidy burden in first quarter. We had $53.5 realisation as compared to $59.82 we had last year. Further, there has been increase in cess since March by approx $5.50 which has also impacted our net realisation.

We cannot just be banking on rupee-dollar exchange rate for improving our bottom line. We need to have proper clarity in terms of subsidy-sharing mechanism. We have been taking up with the government that transparent subsidy mechanism would be of great help to industry.

Do you think the increase in international crude price is likely to continue?

Crude oil price is very difficult to predict. We feel it may not go down substantially below $80 per barrel because lot of investments are taking place in exploration and cost of services are on the rise. It may not also go up significantly as Libya has come back and demand-supply is more or less matching. So we don’t expect a big jump. However, nothing can be said with absolute certainty regarding the movement of crude oil prices.

What according to you is the right formula for sharing of under-recoveries by upstream companies, especially considering that share of upstream companies has been on the upswing in recent years?

We have also represented to government that OIL’s share among upstream companies, which had been 9 per cent four years back, has gone up to 13 per cent last year. This has been because of improved performance of OIL, both in top line and bottom line and increase in production volume. The improvement in OIL’s crude oil and gas volume and increase in net profit, compared to ONGC and GAIL, has been much better. This improved realisation has adversely impacted us in terms of higher net outflow towards subsidy sharing. We have represented to government that efficiency should not be penalised and there has to be some way of creating uniformity in the subsidy sharing mechanism. It should be a standard formula which is predictable.

What is that method of sharing under-recovery which you are comfortable with?

Whatever percentage or methodology is adopted, there has to be a consistency, predictability and transparency in the mechanism of subsidy-sharing so that we know how much we are required to shell out in the beginning as well as during the course of the year which will help us in planning and budgeting our cash flow better and would also be appreciated by Investors which in turn, will boost the valuation of oil companies.

How are under-recoveries on diesel affecting your profits? What is the solution?

When the crude oil price is high, diesel price is also high. Despite the recent diesel price hike, there is still INR 12/litre under-recovery for oil marketing companies. We wish to say that as an upstream company, we don’t have any problem in sharing of under-recoveries but we want to reemphasize that sharing needs to be transparent and we have to also keep in mind our investment plans for which we need to generate internal resources. Diesel being a sensitive product along with kerosene, the sharing can be between upstream, public at large and government at some percentage, so that all segments can bear the subsidy burden. There has to be a price rise at periodical intervals. A complete decontrol of diesel price does not seem feasible at this juncture considering the current political scenario.

What are the key areas in which you plan to diversify?

With the objective of participating in forthcoming shale oil & gas bidding rounds, we are looking at joining with some American companies for some shale assets and to learn to work along with them so that it can be used when shale oil and gas policy is made operational in India.

Coal Bed Methane (CBM) is another area where we are going to focus. At present we have one CBM block in Assam where we are the non-operator.

City gas is another area where we have tied with GAIL, HPCL & BPCL. We want to get into this area in a modest manner. We have also bid for CGD bidding round. So we certainly would like to keep it as one of our diversification avenues.

Furthermore, we have commissioned a 15-mw wind farm last year at an investment of INR 110 crore. We have made a plan of setting up another 50 mw this year with an investment of around INR 400 crore. Thus, getting into solar and wind farm is also as per our broad strategy, as unconventional energy.

What is your debt situation at present? How much is the borrowing?

OIL is totally debt free at the moment. We have talked to many banks and they are quite confident that with the kind of balance sheet we have, raising debt, even big amount, will not be a problem. So with the strong cash balance and nil debt, we can leverage it by having debt to supplement our acquisition.

What kind of price increase in APM gas would you propose considering that RIL gas is coming up for a revision in 2014?

Our gas price was revised in June 2010. At the moment, the price of $4.2 per MMBTU is giving us reasonable return. But with cost of operation going up and new areas being explored, the finding cost is also becoming more. So if the price revision takes place after 2-3 years, it is quite welcome and would be a great relief for us.

How do you expect your stock to perform in 2012-13, considering the challenges concerning subsidy burden and good operational performance and diesel price hike?

Ever since our share has been listed three years back, it has been performing quite steadily. We have also given handsome dividend over the last 3-4 years; and given a bonus of 3:2. So OIL’s share is considered to be one of the blue chips among listed companies and there has been good demand for our shares as a good long-term holding. But of course, the subsidy sharing clarity is not giving the desired price which the company should fetch. With diesel price hike, I am very confident that our share will go up further. I feel that our share price is undervalued by 70-80 per cent at present because of the confusion over subsidy-sharing mechanism.

CAG has said it wants to audit under-recoveries of OMCs. What is its likely implication?

Cost Cell in the Finance Ministry reviews the under-recovery details minutely. They have reviewed it many times in the past. Everything is very transparent as far as oil companies and ministry is concerned.

What is the rig position of OIL?

One of the excellent features of OIL is that we own most of the assets that are required for E&P so that our operating costs also are low. Currently, we own about 14 onland rigs while another six rigs are hired. We are planning to order another 3 rigs this year, which would be delivered after a year of placing the order.

What are your views on Petrotech?

Petrotech is one of the excellent initiatives taken by the Ministry of Petroleum and Natural Gas (MOPNG). It has been happening for the past 17-18 years. The number of participants has been going up with every edition. This year we expect around 4,000 participants. We come in touch with service operators and oil companies available in various parts of the globe. We also get to interact with them and also get to know the latest technology adopted by various oil companies. It is a welcome initiative.

(InfralineEnergy thanks T K Ananth Kumar, Director (Finance), OIL India Limited for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)