BPCL & HPCL: Rising Debt, Rupee Fall Make it Tough for Cos

After forcing state-run refiners to sell products below cost, the government did not compensate BPCL and HPCL for under-recoveries — the major reason why their balance sheets are awash in red.
The losses of these companies in the first half of FY12 have now zoomed to almost four years of their profits. Both the refiners continue to carry the burden of debt and servicing of interest. With no clarity on subsidy sharing and given the government’s patchy record on payments, the future of these OMCs appears bleak.
Over the past few years, the government has adopted a formula to ensure that the burden of under-recoveries is shared equally by all the stakeholders — the government, state-run oil companies and consumers.
However, during FY09, FY10 and FY11, the government steadily reduced its own burden from 69%, 57% to 52% of the total under-recoveries. After maintaining the share of upstream oil producers at close to 31% for several years, it was suddenly raised to 39% in FY11. In the April-June 2011 quarter, the government further reduced its burden to 34% of total under-recoveries apart from easing the burden by slashing taxes. Yet, the government’s share was low, further pushing oil retailers into the red. At that time, it was assumed that the government would make good the losses of these companies in Q2.
That the government did not pay — nor even agree to pay —a single rupee in the second quarter was quite unexpected. Outstandings of state-run oil companies for selling below cost aggregated . 64,900 crore during the first half of FY12 while their daily losses from November are estimated around . 319 crore. The oil ministry has sought . 28,000 crore for the first half of FY12 from the government, in addition to . 15,000 crore received in Q1, towards under-recoveries.
Delayed government payments forced oil companies to borrow heavily to keep operations running. The losses in the last two quarters, coupled with fresh debt, led to HPCL’s debt-equity ratio shooting up to 5.1 while BPCL’s was 3.0 at end September 2011.
There are other worry lines too. Global oil prices remain high. Compounding the problem is the weakening of the rupee. The industry’s total under-recoveries for FY12 are estimated to top . 120,000 crore. With tax revenues moderating and expenditure still high, the government has very little headroom to fund huge under-recoveries.
Hence, risks of public sector OMCs being kept on a bare minimum life support system for an extended period remains high.