Shares of Oil and Natural Gas Corp. Ltd (ONGC) still haven’t recovered from the blow they received after the budget speech. They had fallen 10% on the budget day, and are now about 7% lower compared with pre-budget levels.
The government was expected to reduce the cess on crude oil production; but the degree of change has left investors disappointed. Besides, there are other worries. While low crude oil prices result in a lower subsidy burden, analysts point out that related gains are insignificant, compared with the far larger downside from lower prices.
“Benefits from lower oil subsidy don’t exist for ONGC below the crude price of $50 a barrel,” say analysts from HDFC Securities Institutional Securities. In fact, it raises concerns about (a) lower profits from joint ventures and ONGC Videsh Ltd (OVL), and (2) falling domestic gas prices, according to the brokerage firm. “A muted price regime will further reduce the chances of an early ramp-up of volumes, which have been flat for nearly a decade,” pointed out HDFC Securities in a 2 March report.
The budget blow pertained to the cess on crude oil production, which was changed from Rs.4,500 per tonne to a 20% ad valorem rate. The markets were expecting a 10% ad valorem rate. As the chart alongside shows, the benefit isn’t noteworthy based on the revised rate.
Meanwhile, ONGC’s December quarter performance was adversely affected on account of a huge impairment loss. The outlook for the current quarter too isn’t great. Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd say in a note to clients that there could be further impairment in the March quarter both for domestic operations and for OVL. Given this, one thing is clear—unless there is a meaningful recovery in crude oil prices, one can expect the underperformance in the ONGC stock to continue.
The writer does not own shares in the above-mentioned companies.