Firm crude oil prices should be good for oil producers. But state-owned Oil and Natural Gas Corp. Ltd (ONGC) seems to be an exception.

Despite increasing crude prices, ONGC shares have underperformed the Sensex so far in 2018. The stock is hardly pricey at a valuation of 7.3 times estimated earnings, based on Bloomberg data. But, as one analyst points out, “Valuations are immaterial right now given investor fears that subsidy sharing nightmares have emerged again for ONGC given elevated crude oil prices."

Fears that the company would be asked to bear a part of the subsidy burden weigh on the stock. The government’s budgetary provision for LPG and kerosene for financial year 2019 is 20,800 crore. That is inadequate, making it likely that it would lean on state-owned enterprises (SOEs) to share the burden, said analysts from Jefferies India Pvt. Ltd. It is also likely that downstream SOEs (BPCL, HPCL and IOC) share a non-trivial portion like they did in FY03-07, added the brokerage.

Uncertainty on this matter will keep investor sentiments jittery, capping gains in ONGC’s share price in the near future. Recent news reports indicate the government is mulling a windfall tax on oil producers at crude prices over $70 a barrel.

Meanwhile, ONGC’s March quarter results announced last week fell short of expectations. Stand-alone net profit at 5,915 crore was lower than Street estimates. Higher year-on-year operating costs and exploratory costs written off took a toll on earnings. Higher operating costs were on account of increase in work-over activities and an increase in provisioning for decommissioning of the Panna-Mukta-Tapti field. Workover refers to methods used to improve the productivity of oil wells that have produced for some time.

Further, ONGC’s other income declined by a fifth compared to that of last year, though it was much higher sequentially. Collectively, these factors took away the benefits from better crude oil prices during the quarter. Net crude oil price realizations were $66.7 a barrel, in keeping with expectations and aligned with the general increase in crude prices.

Production performance was discouraging. Crude production declined by 3% last quarter. For financial year 2018, ONGC’s crude production declined marginally by 0.4%. Gas production increased 2.2% for the March quarter, but was a tad lower than expectations. For fiscal 2018, gas production rose 5.8%.

For the stock, while crude prices are the key factor, investors would do well to watch production performance and costs too.