Govt paves way for ONGC offer with 2 new independent directors

The oil ministry has cleared the appointment of two independent directors on the board of Oil and Natural Gas Corporation (ONGC) ahead of its Rs13,000-crore follow-on public offer (FPO) next month.

Renu Sud Karnad, managing director of Housing Development Finance Corporation Ltd and D Chandrasekharam, professor at Indian Institute of Technology, Bombay will be the new independent directors.

The appointments will help ONGC meet market regulator Securities and Exchange Board of India’s norm of having an equal number of executive and non-executive directors.

The state-run oil producer currently has four independent directors, as against six functional directors.

DNA Money couldn’t reach the two new independent directors for comment.

ONGC is expected to file the draft herring prospectus on February 28 for the additional share sale issue, which is expected to open around March 15, D K Sarraf, the company’s director finance, said.

“We expect to raise Rs12,500-13,000 crore, depending on the pricing,” he said, adding that the share sale will increase the market float of the company from the current 16% to 21%.
Bank of America Corp, Nomura Holdings, HSBC Holdings Plc, JM Financial Services, Citigroup Inc and Morgan Stanley are the book runners for the FPO.

Since the government is selling 5% in the offer, its holding will drop from 74.14% at present to 69.14% after the issue.
The proceeds of the additional share sale are part of the government’s budget revenue.

The Congress-led government is keen to raise funds by divesting stake in close to 60 public sector enterprises over the coming years in a bid to bring down the fiscal deficit.

Meanwhile, a key issue remains unresolved for ONGC —- the impasse over Cairn India’s oilfield in Barmer, Rajasthan, in which the state-owned company has a 30% stake but has to pay 100% royalty on the production to the state government under the policy New Delhi devised in the 1990s when it wanted to attract foreign capital and expertise into the oil and gas sector.

ONGC, currently locked in a dispute with Cairn India, a subsidiary of Scottish explorer Cairn Energy Plc, has been arguing that as per the product sharing contract, the royalty payments are cost recoverable.

ONGC officials believe the royalty overhang has already been factored in by the market and would not deter foreign and retail investors from subscribing to the shares.

“I am confident that we should have a good response,” said Sarraf.

In addition to the Rajasthan block, ONGC also partners Cairn India in two other projects —- the state-run oil producer has a 40% stake in the Ravva oil and gas fields off the Andhra coast and 50% in Gauri and Lakshmi gas fields in Cambay basin off the west coast.

A company executive familiar with the matter said ONGC could also ask Cairn India to recover royalty costs from the profits of the Ravva project.

Sarraf declined to comment on this but said ONGC would have to pay nearly $3 billion as royalties on the 6.5 billion barrels Barmer oil block if it continues to pay the entire royalty over the life of the field.

Interestingly, Cairn India too acknowledges that Barmer is a loss-making field for ONGC, but contests the number put by the state-owned company. According to a Cairn India executive, ONGC’s revenues from the Barmer block up to 2019-20 will be $5.8 billion, taking into account the peak output of 175,000 barrels a day and an oil price of $80 a barrel. ONGC will pay $5.28 billion in royalty to the state government, leaving $314 million in cash.

However, as the company also has to spend $878 million as its share of the field development cost, ONGC will have a cumulative deficit of $564 million in 2019-20.