ONGC: Subsidy Burden, OVL are Near-term Concerns

Oil exploration firm ONGC’s December quarter net profit was just 5% lower against the year-ago period, although its subsidy burden jumped almost three-fold. This was made possible by the extra-ordinary income booked towards write-back of royalty paid towards the Rajasthan field. Apart from the government’s constantly shifting subsidy sharing formula, the company also has to worry about the civil unrest in Sudan and Syria, which contribute significantly to its subsidiary OVL’s production. The government changed its subsidy sharing formula for upstream companies once again for FY12. ONGC and Oil India’s contribution was calculated at $56 per barrel of oil sold by them during the first nine months of the fiscal. Since this was calculated at one-third of the industry’s under-recoveries in the first half of FY12, this change in method amounted to a big jump in subsidy burden.
ONGC parted with . 12,536 crore during the December ’11 quarter, which was almost thrice of . 4,222 crore of the subsidy burden in the December ’10 quarter and took the company’s total contribution in the first nine months to a massive . 30,296 crore.
The company’s net sales were down 11% to . 18,517 crore and the operating margins dropped by 1,180 basis points which resulted in a 18.3% fall in operating profits to . 11,050.5 crore. At pretax level, profits were down 29.2%, but the company accounted for . 3,142 crore towards recovery of royalty payments from Cairn, which enabled it to cut the fall at just 5% at the net profit level. ONGC’s physical performance continued to stagnate as crude oil production fell 4.1% to 6.74 million tonne during the quarter, while the gas production was up marginally. Meanwhile, OVL which handles all its overseas investments is facing challenging times. Production at its Imperial Energy assets in Russia continues to stagnate at around 16,000 barrels per day. Besides, its two assets in Syria, where civil unrest has attracted sanctions from the US and EU, and two assets in Sudan, where problems continue after the bifurcation of the country, are currently seeing a production fall. The production from all these assets represented nearly 40% of OVL’s total production in FY11.