A sharp increase in subsidy payments led to Oil and Natural Gas Corp. Ltd (ONGC) performing below expectations in the March quarter.

For fiscal 2011 (FY11), the government increased the subsidy share of upstream oil companies—ONGC, Oil India Ltd and GAIL (India) Ltd—to 38.5% of the cost of under-recoveries of the oil marketing companies. Earlier, the upstream oil companies shared one-third of the subsidy burden.

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Accordingly, ONGC’s subsidy burden increased to 12,136 crore from about 5,000 crore in the March 2010 quarter and 4,222 crore in the December quarter. The higher subsidy payout sharply affected net price realizations, which declined 25% year-on-year (y-o-y) to about $39 ( 1,755 today) per barrel in the March quarter.

“The realization was the lowest in the past nine quarters," wrote Dayanand Mittal of Anand Rathi Share and Stock Brokers Ltd in his post-results note.

Though the firm’s crude oil production improved y-o-y, it fell 3% sequentially to 6.8 million tonnes on account of lower output in Rajasthan. Other than the sharp spike in subsidy, higher depreciation costs also surprised analysts and affected the reported net profit. Depreciation costs were higher on account of higher dry well write-offs. The net profit, thus, came in 26% lower y-o-y.

It’s well known that one of the key concerns for ONGC is the ad hoc nature of the subsidy-sharing mechanism, which makes it challenging for investors to forecast the earnings of the company. For the March quarter, analysts had built in the subsidy share at one-third of the total under-recoveries for upstream companies in their estimates, which led to the disappointment eventually.

“If we strip out the 3,900 crore impact due to higher subsidy-sharing, results are broadly in line with our estimates, based on one-third sharing for upstream," wrote analysts from Edelweiss Securities Ltd in a post-results note.

The uncertainty on subsidy-sharing remains the main overhang on the stock. Another concern would be the higher-than-expected rate of decline in existing matured assets. That could affect production going ahead.

Graphic by Yogesh Kumar/Mint

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