ONGC’s profit for June 2010 quarter plummeted more than expected as the subsidy burden surged. The company’s future prospects appear healthy, however, the government’s ever-changing subsidy-sharing policy poses the key risk.
Till June 2010 quarter, the upstream oil companies were required to contribute towards the under-recoveries only on autofuels. However, with the government decontrolling petrol prices and raising diesel prices in June, the subsidy sharing formula is set to change going forward. Given that the oil industry’s under-recoveries for FY11 will be higher than in FY10 in spite of the recent price increases, ONGC’s subsidy, which stood at 11,555 crore in FY10, is unlikely to ease.
In the June 2010 quarter, the oil industry’s under-recoveries rose to 20,000 crore, increasing the share of upstream companies to 6,667 crore. With over 80% of this shared by ONGC, it had to shell out 5,515 crore as discounts — highest in past seven consecutive quarters and 12-times the year-ago number. This amounted to nearly $33 per barrel of discount, pulling lower the company’s net realisation to $48.04, which stood at $58.25 in June 2009 quarter.
The subsidy burden was so heavy that the benefits of decontrolled gas prices failed to make a mark. The administered pricing mechanism was dismantled in April on the 48.5 mmscmd gas sold from nominated fields, which is expected to add 3,500 crore to its bottomline on an annualised basis. Although the company made nearly 850 crore higher profits on this count its net profit fell 24%, which shows the severity of these subsidies. Even the ONGC management couldn’t help call the subsidy burden ‘excessive’.
The 7% appreciation in rupee against the year-ago period played another trick on the company’s financial numbers as it bills its customers in rupees. The net realisation on crude oil, which appeared only 17.5% lower on y-o-y basis in dollar terms, was actually 22.6% down in rupee terms. In other words, every barrel of oil sold during the quarter fetched 22.6% lower price to the oil major compared to the June 2009 quarter. While the company’s oil production stagnated, it basically was the higher revenues in its gas business that enabled ONGC to restrict fall in net sales to mere 8.1%.
The company continues to remain fundamentally strong, with its production likely to increase gradually over next few years. Its attempts at diversifying the revenue base will also start giving results as its two petrochemical complexes and a power plant come up over next 18-20 months. However, the subsidy uncertainties continue to make it a doubtful investment candidate for retail investors.
No comments:
Post a Comment