INDIA’S leading oil and gas producer Oil & Natural Gas Corporation (ONGC) stumped the markets with results substantially below expectations. A jump in exploration costs which proved to be unsuccessful and absence of other income led to ONGC reporting a profit of Rs 3,054 crore — well below market estimates which had pegged it at close to Rs 4, 800 crore.
ONGC’s subsidy burden was lower by 28.6% against the year ago period at Rs 3,497 crore, which helped boost net realisation to $57.7 per barrel as against $34 in the year-ago period. It were these positives that had prompted analysts to project a much higher profit number.
Although the lower subsidy burden and higher net realisations were in line with market expectations, ONGC’s writing-off Rs 2,480 crore of unsuccessful exploration expenditures was unexpected, which added 63% to its depreciation burden. It wrote off nearly Rs 660 crore on two dry wells drilled in the Konkan-Kerala offshore, around Rs 500 crore towards dry wells in KG basin and close to Rs 250 crore towards dry wells in Mumbai High. ONGC annually drills around 150-160 wells every year and writes off the expenditure if they turn out to be ‘dry’ or without any hydrocarbons.
Similarly, ONGC’s other income turned negative during the quarter from Rs 1,037 crore in the December 2008 quarter. The company converted its loan to wholly-owned subsidiary ONGC Videsh (OVL) to an interest-free loan and wrote back Rs 460 crore received as interest in first half of FY10. Reduction in overall interest rates to 6% from 11% also brought down ONGC’s other income. Going forward, the company has agreed to extend loans up to Rs 5,000 crore to its other subsidiary MRPL at discounted rates.
The scrip dipped 2% to Rs 1,140 on Thursday before the results were announced. Adjusting for the December 2009 profit numbers, ONGC’s current market price is 16 times its earnings for trailing 12 months.
Going forward, the main positive trigger for ONGC remains the revision in gas prices. ONGC is losing over Rs 2,000 crore annually on the sale of natural gas under administered prices, which could be recouped if the price increase takes place. Considering that the ONGC stock has underperformed the benchmark Sensex over the past six months, the current valuation appears fair and reasonable. Superior March 2010 quarter numbers could help the scrip gain some traction.
ONGC’s subsidy burden was lower by 28.6% against the year ago period at Rs 3,497 crore, which helped boost net realisation to $57.7 per barrel as against $34 in the year-ago period. It were these positives that had prompted analysts to project a much higher profit number.
Although the lower subsidy burden and higher net realisations were in line with market expectations, ONGC’s writing-off Rs 2,480 crore of unsuccessful exploration expenditures was unexpected, which added 63% to its depreciation burden. It wrote off nearly Rs 660 crore on two dry wells drilled in the Konkan-Kerala offshore, around Rs 500 crore towards dry wells in KG basin and close to Rs 250 crore towards dry wells in Mumbai High. ONGC annually drills around 150-160 wells every year and writes off the expenditure if they turn out to be ‘dry’ or without any hydrocarbons.
Similarly, ONGC’s other income turned negative during the quarter from Rs 1,037 crore in the December 2008 quarter. The company converted its loan to wholly-owned subsidiary ONGC Videsh (OVL) to an interest-free loan and wrote back Rs 460 crore received as interest in first half of FY10. Reduction in overall interest rates to 6% from 11% also brought down ONGC’s other income. Going forward, the company has agreed to extend loans up to Rs 5,000 crore to its other subsidiary MRPL at discounted rates.
The scrip dipped 2% to Rs 1,140 on Thursday before the results were announced. Adjusting for the December 2009 profit numbers, ONGC’s current market price is 16 times its earnings for trailing 12 months.
Going forward, the main positive trigger for ONGC remains the revision in gas prices. ONGC is losing over Rs 2,000 crore annually on the sale of natural gas under administered prices, which could be recouped if the price increase takes place. Considering that the ONGC stock has underperformed the benchmark Sensex over the past six months, the current valuation appears fair and reasonable. Superior March 2010 quarter numbers could help the scrip gain some traction.
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