Falling crude, stagnant output may dent ONGC’s bottomline

Lower Subsidy Burden, Rupee Depreciation May Not Help Much

INDIA’S biggest oil explorer Oil and Natural Gas Corporation (ONGC) is expected to post a sharp decline in profit for the quarter ended December 2008 as falling crude prices and stagnant output offset gains from a projected drop in the company’s subsidy burden due to discounted crude oil sales to state-run refiners.
Estimates by ET Intelligence Group ahead of its third quarter results announcement on Wednesday show that the country’s largest petroleum company may post a 31% fall in net profit to Rs 3,026 crore on a 5% dip in sales to Rs 14,315 crore. The financial burden on the company due to subsidised sales is estimated to be 38% lower at Rs 3,770 crore.
While several broking houses are also projecting a sharp contraction in ONGC’s October-December bottomline, some of them see the state-run firm posting a profit on the lower subsidy and favourable currency movements.
Angel Broking estimates that ONGC’s net profit will fall by more than a third while Khandwala Securities expects it to shrink by nearly a quarter. ICICI Securities sees a 17% drop in profits at Rs 3,368 crore. A Reuters poll of 16 brokerage houses estimates that an 8.2% drop in bottomline.
The most optimistic view is from Karvy Stock Broking, which sees ONGC’s profit rising by nearly a fifth to Rs 4,839 crore.
“Though the current crude oil price is below $50/barrel, we believe that the lower subsidy burden and weak rupee are expected to provide a major relief,” Karvy said in a recent report.
Following the recent fall in crude oil prices, the average gross realisation for ONGC during the quarter is estimated at $61 per barrel, nearly a third lower compared to the same period in 2007.
The negative impact of the price slump is likely to be offset by some extent due to the rupee depreciation. This is because ONGC’s crude selling contracts are denominated in US dollars and the company realises the contract value at the prevailing rupee-dollar exchange rate.
During the third quarter of 2008-09, the rupee fell by 23.6% against the dollar.
“ONGC’s oil price realisation post subsidy would be 22% lower at $44.4 per barrel. However, a weaker rupee will mean the Q3FY09 oil price realisation net of subsidy is just 4% lower in rupee terms,” says a report by brokerage Merrill Lynch.