Optimizing return on equity through treasury operations: Oil and gas E&P
Business value chain and treasury
The importance of treasury across the business value chain in India has to be played up significantly.
The role of treasury in India has traditionally been limited to hedging currency and interest rate risk and deployment of surpluses from business.
Accordingly, the importance of treasury across the business value chain has, at times, been under-played leading to a lopsided view on the hedging strategy.
The aspects of treasury management that have generally escaped the attention of oil and gas exploration companies include:
- Dollarized nature of the commodity dealt in and its impact on the hedging strategy
- Post-tax return on investible surplus and its impact on the overall return on capital employed
- Management and utilization of liquidity across entities
- Tapping international bond markets to avail financing for expansion
The business value chain and the role of an integrated treasury across the business value chain are depicted below:
Questions for corporate treasurers in oil and gas exploration and production
- Have you swapped your External Commercial Borrowings into INR?
- Are you able to manage the currency risk of individual blocks?
- Do you hedge your capex imports on a transaction by transaction basis?
- Is the post-tax return on surplus investment dragging down the overall return on capital?
- Have cross border tax and pooling implications been considered for liquidity across geographies?
- Are INR borrowing costs denting net profit margins?
- Is hedging of commodity price risk consistent with the industry practice?
*Refer to the attached PDF for source information.