Better fuelled future

ONGC will benefit from fuel price deregulation and changes in the subsidy sharing mechanism

ONGC will benefit from fuel price deregulation and changes in the subsidy sharing mechanism

The gas price revision and reforms on automobile and cooking fuels during the first quarter had a positive effect on ONGC’s September quarter results. The subsidy burden declined 45 per cent over the first quarter, though it increased 15 per cent year-on-year due to higher volumes. Net realisations at $62.7 a barrel (after discounts to oil marketing companies) improved 30 per cent sequentially and 12 per cent y-o-y.

However, its oil and gas production suffered because of maintenance shutdowns in July. Production, at 13.1 million tonne oil equivalent (mmtoe) went up marginally by 0.7 per cent sequentially and declined 0.2 per cent y-o-y. Inventory built up in the previous quarter aided oil and gas sales of 11 mmtoe, up two per cent y-o-y. Thus, revenues went up 20.5 per cent y-o-y.

The top line improvement, with better volumes and higher prices aiding revenue growth, did not reflect commensurately in its profits due to higher depreciation charges of Rs 4,400 crore, up 87 per cent y-o-y and 41 per cent q-o-q. The write-offs on dry wells (ultra-deep water wells in the Krishna-Godavari Basin) was at Rs 2,440 crore, increasing almost four times from the September 2009 quarter. Other income of Rs 1,140 crore, however, helped net profit rise six per cent y-o-y.

During the quarter, ONGC succeeded with one more discovery in the Cambay basin. Current exploration activities continue in seven deep water Nelp blocks in FY12, and it has begun tapping opportunities in unconventional shale gas, too. With continued exploration and production activities and benefits coming through, ONGC is set to gain from continuing reforms in auto fuel deregulation in the second half of FY11, which will help its FY12 earnings growth. The government is also reworking the subsidy sharing mechanism to reduce the subsidy burden on PSU oil and gas majors. The stock has appreciated 27 per cent on multiple triggers since mid-May and may see more triggers.