ONGC: Production Growth to Boost Oil Co’s Profitability despite Price Fluctuations

ONGC’s net profit for the quarter to March doubled in spite of a higher subsidy burden and stagnating production with oil prices ruling high coupled with a weak rupee. A production growth from FY13 onwards will enable it to improve profitability irrespective of crude oil price fluctuations. ONGC’s crude oil production for the March quarter at 6.58 million tonne was 3.2% below the year-ago period. Still average prices were 11.7% higher at $121.64 a barrel at the gross level. A weak rupee meant that in rupee terms, the price was nearly 24.1% higher at . 6,117 a barrel.
This was the key factor that boosted ONGC’s profitability while the discounts it needs to extend to downstream local oil marketing companies rose 16.8% to . 14,170 crore.
The company’s revenues grew by 22.8% to . 19,340 crore in the quarter mainly due to higher oil prices and a weak currency. Thanks to this, the company was able to limit its expenditure growth to just 7%. This propelled the 56% growth at the operating profit level to . 8,020 crore.
ONGC’s depreciation, which includes depletion, amortisation and impairment losses, fell 41.5% to . 1,349.3 crore. The resultant pre-tax profits were double that of the yearago numbers. The exploration firm has been regularly making new discoveries and was able to add 84.13 million tonne of oil equivalent (MTOE) to its reserves, while production was 47.03 MTOE. These have put its reserve replacement ratio — a measure of how much the company added to its reserves while pumping out each barrel of oil — at 1.79, its highest in nearly two decades and an indication that its recoverable reserves are growing faster than its current production level, giving more visibility to its future growth.
ONGC has set its eyes on improving oil production in FY13, which has been stagnating for long. This should enable it to post better profitability in FY13, as fluctuations in crude oil prices are of little consequence to the company due to subsidy discounts. 

KEY POINTS ONGC’s crude oil production for the March quarter at 6.58 million tonne was 3.2% below the year-ago period
Average prices were 11.7% higher at $121.64 a barrel at the gross level
A weak rupee meant that, the price was nearly 24.1% higher at . 6,117 a barrel
The reserve replacement ratio — a measure of how much the company added to its reserves while pumping out each barrel of oil — is at 1.79, its highest in nearly two decades