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Subsidy concerns persist for ONGC

Subsidy concerns persist for ONGC
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First Published: Thu, Jul 28 2011. 10 55 PM IST
Updated: Thu, Jul 28 2011. 10 55 PM IST
Oil and Natural Gas Corp. Ltd’s (ONGC) financial results for the quarter ended June look good when compared with the previous quarter’s growth metrics. Total operating revenue and net profit increased by 18.6% and about 12% year-on-year, respectively. Whereas, for the March quarter, revenue was almost flat and net profit had fallen by 26% year-on-year.
Of course, March quarter numbers were mainly hit because the government asked upstream companies to share a higher proportion of the overall under-recoveries of oil marketing companies. For fiscal 2011 (FY11), the subsidy share of upstream companies was increased to 38.5% unexpectedly in the March quarter. In the earlier years, the upstream oil companies shared one-third of the subsidy burden. Essentially, this uncertainty surrounding the subsidy-sharing mechanism is viewed as one of the main problems for ONGC.
Naturally, if it weren’t for the subsidy-sharing, ONGC would have benefited immensely currently, when oil prices are higher. But, because of subsidy, the company earned lower net realizations, which stood at $48.76 per barrel in the June quarter, just marginally up from the year earlier.
However, on a sequential basis, net realizations have improved considerably from about $39 per barrel. Analysts were expecting a sequential improvement in the net realizations because of higher crude prices and a relatively lower proportion of upstream subsidy-sharing—one-third of the total under-recoveries. ONGC’s gross realizations though have increased by 50% to $121 per barrel.
Investors are now looking forward to the company’s upcoming follow-on public offer (FPO). Going by past issues, the FPO pricing could be at a discount to the prevailing market price, which should offer good opportunities for retail investors to consider the stock.
In general, if crude oil prices decline, too, it would be good news for the company, as overall under-recoveries would reduce.
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First Published: Thu, Jul 28 2011. 10 55 PM IST