ONGC: Hard times

The sharp fall in crude oil prices, by nearly 70 per cent to around $ 45 per barrel currently, is expected to hurt the net realisations for Oil and Natural Gas Corporation (ONGC) in the current and coming quarters. Net realisations for ONGC were down 15 per cent y-o-y during the September 2008 quarter at $46.7 per barrel. Remember that crude oil prices averaged around $ 120 during that period.

Also ONGC will be hoping that it won’t need to compensate oil marketing companies (OMCs) such as BPCL and HPCL too heavily for losses incurred by them on their retail sales. Typically ONGC and GAIL help support the oil retailers because the latter are forced to sell petrol, diesel and other products at prices that don’t cover the costs. In December 2008, the price of both diesel and petrol were cut by Rs 2 and Rs 5 per litre, respectively and that would have hurt retailing margins of OMCs.

It’s hard to put a number to the subsidies but ONGC forked out around Rs 22,500 crore in the first half of 2008-09. Despite this, stand-alone sales rose by 29 per cent y-o-y to Rs 37,560 crore, in the six months to September 2008, while net profits were up 18 per cent. However, 2009-10 could be a difficult year for the oil major and consolidated sales might actually be flat or marginally lower with profits slipping.

A Citi report has revised estimates for oil prices in 2009 from $ 90 to $65 per barrel; it’s possible prices could trend lower. Meanwhile, ONGC’s acquisition of Imperial Energy at a price of 1,250 pence per share is being seen as somewhat expensive particularly because crude oil prices have dropped sharply. Besides, Imperial’s oil reserves are spread over 17 blocks, implying that the cost of production could be higher in Russia, thereby hurting profitability.

Also, ONGC and its partners have signed production sharing contracts for 20 oil and gas exploration blocks that they won in the bid for NELP VII. However, analysts point out that till production takes off, ONGC’s production levels may be subdued – oil output was down 2 per cent during the September 2008 quarter.