ONGC’s June 2011 quarter profits were up 12% against the year-ago period. But, the company’s performance was lackluster. Production of oil and gas dipped lower, while net realisation stood at just $48 per barrel after its share of subsidy burden. An expected reduction in subsidy burden in rest of FY12 and a possibility of favourable resolution of royalty issue of Rajasthan fields weigh favourably for the company’s earnings growth. Following the petro-product price hikes and duty cuts by June-end 2011, the industry’s under-recoveries are set to fall considerably in the rest of the three quarters. This could enable ONGC to obtain a higher price for its crude oil. “If upstream companies have to bear only one-third of the subsidy burden as in June 2011 quarter, our estimated full-year net realisation of $53/bbl would have significant upside risk,” mentioned a Goldman Sachs report on ONGC.
The other key positive would be Cairn India’s acceptance to make royalty cost recoverable for the Rajasthan block. Since commencement of production in FY10, ONGC has paid nearly . 1,500 crore towards royalty share. A favourable verdict in this matter would not only reverse this, but would significantly reduce its future royalty payments, thereby boosting the bottomline. Cairn India will hold a postal ballot to seek shareholder approval for this change in treatment of royalty.
During the June 2011 quarter, ONGC’s operating profit margins were under pressure, but the profits got a fillip from a 79% jump in other income. However, its depreciation jumped 32% to . 4,122.5 crore mainly due to the . 1,879-crore dry well expenditure written off. This restricted net profit growth at 12% y-o-y. The company plans to drill 12 deepwater wells in FY12 in Andaman, KG and Mahanadi basins. Every such well costs . 200-400 crore, its depreciation costs are expected to stay high.
ONGC is being valued at around 11.8 times its earnings for the past 12 months.
The other key positive would be Cairn India’s acceptance to make royalty cost recoverable for the Rajasthan block. Since commencement of production in FY10, ONGC has paid nearly . 1,500 crore towards royalty share. A favourable verdict in this matter would not only reverse this, but would significantly reduce its future royalty payments, thereby boosting the bottomline. Cairn India will hold a postal ballot to seek shareholder approval for this change in treatment of royalty.
During the June 2011 quarter, ONGC’s operating profit margins were under pressure, but the profits got a fillip from a 79% jump in other income. However, its depreciation jumped 32% to . 4,122.5 crore mainly due to the . 1,879-crore dry well expenditure written off. This restricted net profit growth at 12% y-o-y. The company plans to drill 12 deepwater wells in FY12 in Andaman, KG and Mahanadi basins. Every such well costs . 200-400 crore, its depreciation costs are expected to stay high.
ONGC is being valued at around 11.8 times its earnings for the past 12 months.
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