ONGC’s December quarter results were peculiar. The company’s profit figure was substantially higher than what people had guessed. The ONGC management had given an indication in the past about its attempts at getting its dues out of the Gas Pool account — a relic from the era of administered price mechanism (APM) for natural gas sales. That the largesse would arrive in this quarter was something unknown. But it probably had more to do with the timing of ONGC’s followon public offer (FPO), which the government is bent on bringing out before the financial year ends. Even though a one-time income, technically this 1,898 crore received from the pool account may not be regarded as ‘extra-ordinary’, as it was created out of the company’s past revenues. Still for the normalisation purpose, if one were to remove its impact, the company’s quarterly profit stood at around 5800 crore. This, too, was around 5-10% higher than what the Street was expecting.
The company’s other income for the quarter also appeared substantially higher, mainly due to the reversal of 460 crore of interest from ONGC Videsh in December, 2009 due to conversion of its loans to interest-free loans. At the same time, a 22% drop in its depreciation provisions, which includes amortisation or impairment losses, helped.
It seems as if the government has been fulfilling ONGC’s minor wishes ahead of its FPO, while being unable to grant the major ones. Compared with an almost three-fold jump in the company’s subsidy burden in the first half of FY11, the subsidy burden grew just 21% in the December quarter, despite rising under-recoveries for the domestic oil sector. In fact, the net realisation in rupee terms, which was 7.7% lower in the first half, turned out 8% higher in the December quarter against the year ago period.
Earlier this financial year, the APM was dismantled for ONGC’s natural gas sales after it argued for years that natural gas had turned a loss-making proposition for it. Now, it gets its dues from the Gas Pool account.
ONGC’s plea to bring in a formula-based subsidy sharing mechanism has been falling on deaf ears. This has built an inherent fear factor among the company’s investors, as they can’t rightfully predict its future performance. The ONGC chairman’s comments that oil prices above $70 a barrel hurt the company and the underperformance of the scrip in the past one-and-a-half months, when global oil prices gained consistently, has not been a coincidence after all.
The second major item on ONGC’s wishlist is, of course, a redressal of its liability towards 100% of royalty payments for crude oil produced from Cairn’s Rajasthan blocks, in spite of holding only 30% equity stake. This arrangement came into being when ONGC was granted the stake in the discovery free of cost. This has left the company in a position where growing sales volumes out of the Rajasthan fields are not adding to its net profit in any meaningful manner. No wonder, ONGC today wishes it had paid for that 30% stake once and for all, instead of carrying over the obligation for its entire life.
But one good thing that the December quarter results quietly underlined is the company’s steady production growth from nominated blocks, which had stagnated for a long time. It produced over 6.2 million tonne of oil from the nominated blocks, which was 1.7% higher than last December and 0.9% higher from the September 2010 quarter. This is surely a good sign for the company’s future. The results are sure to fire up the ONGC scrip on Monday when the markets open — something the government would be keen to watch particularly as it plans for further stake sale. The bonus and stock split will prove to be other attractions for the investors. While the stock remains fundamentally good for long-term investment, investors must not forget that the company’s fundamental problem of ad hoc subsidies remains unaddressed.
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