ONGC: Fairly good going

If at Rs 4,850 crore, ONGC’s net profit for the June 2009 quarter was slightly off analysts estimates, it was due to higher depreciation, depletion and amortisation, lower other income and some one-time expenses on employees. The strong numbers are the result of a higher realisation per barrel. Sales for the company were somewhat lower sequentially.

Of course, net profits have been lower year-on-year because crude oil prices last year were far higher at close to $70 per barrel. The amount of subsidy that ONGC forked out in the June quarter was just under Rs 10,000 crore — the oil major compensates oil marketing companies as they sell auto fuels, such as diesel and petrol, at prices that are less than the cost of production. Should the government decide to lower the oil subsidy, it would mean better realisation for ONGC. The stock currently trades at Rs 1,100 and Kotak Securities values it at Rs 1,200 over a 12-month period.

Meanwhile, oil producer Cairn India’s operating profit for the June 2009 quarter at Rs 130 crore — up 66 per cent sequentially— was more or less in keeping with the Street’s estimates. The company managed crude oil realisations of $60.2 barrels a day while production was up marginally, resulting in consolidated net revenues of Rs 200 crore, up nearly 13 per cent sequentially. However, the quarter’s numbers aren’t too important as the company’s value lies in the production blocks in Rajasthan, from where the first train of 30,000 barrels per day is expected to start in August.

The price of the crude has been linked to Bonny light and fixed at a discount of 10-15 per cent to dated Brent. Kotak Securities points out that Cairn’s decision to pay cess on its share of production at the prevailing rate and then resolve the dispute could pose some downside risks even if it allows the company to go ahead with production.

The stock has been a big underperformer since March this year, gaining around 46 per cent to the Sensex’s rise of 76 per cent. At the current price of Rs 233, analysts believe the stock is expensive.