Rising oil prices do little good to state-owned upstream firms such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL), since the government does not allow them to frequently increase prices paid by consumers. Rising subsidies hurt net realizations.

Of the two, ONGC gets a harder knock than OIL.

For example, ONGC’s gross realizations for the December quarter were $89.13 (Rs4,029 today) per barrel and net realizations stood at $64.79 per barrel. The same figures for OIL were $85.68 and $67.14 per barrel, respectively. For the nine months ended December, ONGC’s gross realizations were $83 per barrel and net realizations were $58.72, and the same for OIL were $79.73 per barrel and $60.57, respectively. One reason for OIL’s better realizations is the relatively lower proportion of subsidy, say analysts.

But the comparatively higher realizations have not materially affected OIL’s performance in the December quarter. Revenue growth was flattish at Rs2,475 crore compared with the September quarter, mainly because the subsidy burden increased sharply by 40%, to about Rs560 crore, thanks to higher oil prices. Having said that, revenue increased by 19% on a year-on-year basis driven by good performance from the transportation business, higher crude oil and gas price realizations.

Operating costs were higher (mainly employee costs and other expenditure), which led to poor operating performance. Operating profit margin fell by 360 basis points to 53%, from 56.6% in the September quarter. Operating profit was down by 6%. The weak operating performance was offset to some extent by higher other income and a 2% decline in tax outgo, resulting in a flattish performance at the net level. Net profit stood at Rs908 crore.

OIL’s stock has done well this fiscal and has outperformed the BSE Oil and Gas index and BSE-200 of the Bombay Stock Exchange so far. That does make valuations a tad expensive currently. Moreover, uncertainty on subsidy-sharing policy and higher oil prices cloud the earnings visibility to some extent.

Add to that the fact that high inflation has made implementing the decision to deregulate diesel prices very challenging.