ONGC gains from lower subsidy share

Oil and Natural Gas Corp. Ltd’s (ONGC’s) financial performance for the March quarter has pleasantly surprised investors. One reason why the numbers beat expectations is because some analysts had assumed a higher subsidy-sharing quantum for the state-run upstream oil companies, which did not happen.

Upstream companies shared about 40% of the total under-recoveries, or the losses that state-run refiners incur because of selling fuels below cost to consumers, in fiscal 2012 (FY12), whereas some analysts were expecting upstream companies to share a bit more than that because of surging under-recoveries.

Moreover, ONGC’s share in the total upstream subsidy burden has come down. In FY12, its subsidy-sharing proportion stood at 81% in the total upstream subsidy burden, which was lower by 130 basis points from that in FY11. A basis point is one-hundredth of a percentage point. Of course, if ONGC’s subsidy share has declined, then someone else has to bear that burden, and this time it was Oil India Ltd, whose subsidy-sharing proportion has increased.

So, ONGC’s March quarter numbers look good. Net profit during the quarter has doubled from a year earlier to Rs 5,644 crore and net realization has increased by 14% to $44.32 per barrel.

Of course, this does not mean that all is well, simply because the uncertainties surrounding the subsidy-sharing mechanism continue to persist. Secondly, it does not look like there will be many positive surprises on the production front.

“We expect domestic production to grow 2% y-o-y (year-on-year) in FY13 on growth in crude production of 1% y-o-y and gas production of 3% y-o-y,” pointed out a note from IIFL Research last month. ONGC’s total crude oil production in FY12 declined by 1.3% from a year earlier, while gas production has improved marginally.

Further, its overseas unit, ONGC Videsh Ltd, is facing production problems because of political unrest in Syria and Sudan. Investors would do well to watch developments on that front.

While those concerns are there, there is a ray of hope for investors in the form of attractive valuations. At Rs 256.35, the ONGC stock trades at 8.3 times its estimated earnings for the current fiscal year, which doesn’t look steep.

Of course, it goes without saying that reforms in the form of price hikes would be welcome, but the possibilities of that happening in the current environment appear bleak

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Also See | Quaterly perfomance (PDF)

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