ONGC reported dismal 4QFY2009 performance owing to lower net realization, decline in crude oil sales, higher other and DD&A expenditure. The government also continued with its ad-hoc Subsidy sharing structure during the quarter.
While the company was informed by the government during its 3QFY2009 results that it would not be required to pay any subsidy during 4QFY2009, the company had to subsequently share the subsidy burden post a communication by the government in May 2009.
At the start of the fiscal, when the government had projected total under-recoveries close to Rs2,00,000 crore for the full year and ONGC was expected to bear Rs32,000 crore (16% of the total subsidy burden).
However, actual subsidy burden during the year was much lower at around Rs105,000 crore, the company shared subsidy of Rs28,226 crore in spite of the significant reduction in subsidy during the year. Thus, the Subsidy sharing mechanism has been ad-hoc in nature.
With a stable and reform-oriented government at the Centre, we can expect reforms both on the auto fuel pricing as well as re-dressal of this ad-hoc Subsidy sharing structure going ahead.
ONGC management has also indicated the same in it post result analysts meet. We believe the prospective partial auto price deregulation is largely factored in the stock price and any disappointment on this front would result in underperformance by the stock going ahead.
Similarly, ONGC’s APM gas price hike is currently overdue for more than couple of years.
We believe the issue is likely to be taken up by the government in the next 3-4 months and there could be adherence to the Tariff Commission recommendation, which in turn would lead to increase in APM gas price by 20% adjusted for the inflation impact.
However, we are still not building the same in our estimates pending further clarity on the same. The move could result in increase in ONGC’s consolidated EPS by around Rs4. ONGC management has stated that Oil Sector reforms are amongst the key priorities of the government.
Further, management has said that it has put forward various pricing mechanism based on the crude oil price to the government and discussion on the same are likely to commence shortly.
Similarly, management has also provided the government with various strategies to do away the ad hoc nature of Subsidy sharing mechanism. Thus, we believe the regulatory action is likely to be the key catalyst going forward.
On the production front, we expect production of crude and natural gas from ONGC’s domestic fields to show marginal growth with production being maintained through IOR/EOR from its aging fields.
Also, implementation of several schemes to maintain production volumes are under development such as at its Vasai (East) project, C-series project and Heera project. On the overseas front too, it expects to maintain its production levels.
Crude prices registered a stellar rally during the quarter. However, much of these gains would be negated by ONGC’s higher subsidy burden.
Under-recoveries have once again started to come into picture for auto fuels with losses currently at Rs3 per litre on diesel and Rs6 per litre on petrol. Thus, upside from higher crude oil prices is capped to a significant extent.
Moreover, given the political compulsions implementation of pricing reforms look difficult and are likely to impact the company negatively going ahead. We maintain our NEUTRAL rating on the stock.