ONGC’s share of the subsidy for loss-suffering Oil Marketing Companies (OMCs) stood at Rs49 billion in Q3FY09, much higher than the Rs38 billion we expected.
Thus, for Q3 while crude was billed at $59/bbl, the net realization was only $34. We believe that the higher subsidy sharing in Q3 was to recompense the lower sharing by upstream players in H1.
We believe that in Q4 subsidies would not be shared by upstream players if crude prices continue at present levels. (Over-recovery on auto-fuels could compensate for losses on cooking fuels.) The risks to our assumption would be price cuts or duty changes.
ONGC’s net profit for the recently concluded quarter plunged 43% y-o-y to Rs25 billion, well below our expectations.
While the physical performance was in line with our estimates, the financial performance was struck by higher expenditure (other expenditure) and higher subsidies.
Earnings depend on government policy regarding subsidy sharing. Risks to our FY09 estimates lie in the subsidy-sharing policy for Q4.
Our valuation is the sum of a DCF-based valuation of ONGC’s 1P reserves and the market value of its cash and investments. Key risks are regulatory and those related to the E&P business.