Oil cos' debt-equity ratio sees a sharp rise

Increased borrowings to fund under-recoveries have skewed the ratio.

The public sector oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — have seen a sharp increase in the debt-equity ratio during the first three quarters of the current year as they increased borrowing to fund record under-recoveries.

The debt-equity ratio for HPCL for instance increased almost three-fold to 4.64:1 as on December 31, from 1.59:1 as on April 1, 2008, as oil prices touched a record high of $142 a barrel in july 2008 before declining to double digit levels.
 

DEBT CHARGE
Company	Debt-equity ratio

1-Apr-0831-Dec-08 IOC0.86:11.44:1 BPCL1.29:12.90:1 HPCL1.59:14.64:1 Source-Ministry of Petroleum & Natural Gas

As on December 2008, borrowings for the three companies together stood at Rs 107,165 crore.

A high debt-equity ratio also implies a high interest expense.

The interest liability of OMCs is projected at Rs 7,484 crore for the whole fiscal as against Rs 2,925 crore in the previous year.

Under-recoveries for the year are estimated to be a little over Rs 100,000 crore for the three companies, which have accumulated losses of Rs 11,094 crore during the nine-month period.

“The OMCs are estimated to close the financial year 2008-09 with under-recoveries of Rs 103,908 crore,” Petroleum Minister Murli Deora informed the Parliamentary Committee, which met on February 17. Of this, Rs 60, 967 crore has been compensated by the issue of bonds, while another Rs 32,000 crore has been absorbed by the upstream companies.

The average price for Indian basket of crude during the April-January period stood at $91.42 a barrel vis a vis $79.25 for the whole of 2007-08.

The erosion in net worth during the first nine months was 43 per cent for HPCL, 25 per cent for BPCL, and 9 per cent for IOC.

The under-recoveries have resulted in weak cash flows, thus compelling them to borrow heavily from the market.

“The high debt-equity ratio was due to the losses we incurred in the form of under-recoveries and we had to borrow heavily. However, the situation is improving now and the picture at the close of this fiscal should be different,” said B Mukherjee, director (Finance), HPCL.

Finance officials at IOC and BPCL reiterated Mukherjee’s view and hoped the situation to change with the issue of oil bonds.