ONGC: Piping in a brighter future

Subsidies and lower sales took a toll on profits, but the impact of the price deregulation will be felt next quarter.

While problems continue for ONGC at the moment, things might improve in the coming quarters. The company did not have a great June quarter, when its net profit dipped 24.5 per cent to Rs 3,661 crore from Rs 4,848 crore in the corresponding quarter of the previous financial year. Revenues, too, dropped 8.1 per cent to Rs 13,710 crore during the same period.

According to analysts at HSBC, while the government freed petrol prices, this affected only a one-time increase in the retail prices of diesel, kerosene and LPG. As a result, they estimate total underrecovery to remain at a significant Rs 63,700 crore for the financial year 2011. The government has indicated that one-third of this will be funded by government-owned upstream companies and, hence, ONGC is expected to bear around 25 per cent of the same.

Upstream companies had already funded the underrecoveries on sale of auto fuels in the financial year 2010 (around 31 per cent of total underrecoveries). This ad hoc determination of sharing the underrecovery burden is expected to continue and would, therefore, impact ONGC and its valuation will remain lower than its global peers.

Moreover, operational factors also remained weak with the nominated crude production falling 1.1 per cent over the year and 1.9 per cent sequentially. Even crude sales were much lower than expected. Nominated sales-to-production ratio was the lowest ever at 80.8 per cent due to an increase in inventories. In the Assam region, inventories increased 60,000 tonnes, while overall increase in inventories for nominated crude was around 130,000 tonnes, say analysts.

While gross crude realisations increased 33.4 per cent to $80.8 a barrel, the company bore Rs 5,520 crore as the subsidy for the June quarter, implying discounts of $32.8 a barrel — higher by around 18 per cent over the March quarter. This caused net realisations to be lower at 6.5 per cent over the March quarter to $48.1 a barrel.

Still, the second quarter is expected to be better as the full impact of an increase in petroleum product prices and natural gas prices would kick in. Clarity on the subsidy-sharing mechanism and the stability of the rupee would be positives.