ONGC - spoiled by subsidies

ONGC, India's biggest energy explorer posted a decline in fourth quarter profits and it has been attributed to the fall in production. Net profits of the company declined by about 16% to around 2200 crore rupees in the quarter ending March 31 2009. It had clocked almost 2600 crore of profits in the corresponding period in the previous year. Sales declined by 12% to about 13,800 crore rupees.

The drop in the earnings was offset to some extent by the decline in subsidies paid to state refiners. The subsidies were paid through discount on crude sales after the oil prices slumped last year. The concessions that are being given to the marketing companies such as Indian oil corporation is set to increase after the recent surge in the oil prices.

This is one reason why many people hate to invest in companies whose fortunes are dictated by the government. ONGC can do nothing but can increase its outputs and not the prices. And this time, the output has faltered leading to the dip in profits. ONGC’s subsidy bill climbs when oil prices rise above $70 a barrel.

Oil production from the company declined by around 7% to about 6.4 million metric tons. However, Gas outputs rose marginally from 6.14 billion cubic metres to about 6.16 billion cubic metres. Output was affected by a three-day strike that ended on Jan. 9. Production was restored three days after the strike ended, at 320,000 barrels of oil a day and 44 million cubic meters of gas daily.

ONGC was given temporary exemption by the government from subsidizing the refiners in the fourth quarter after oil prices fell from their July peak. Once oil started to climb in February, a subsidy of “around 9.4 billion rupees” was imposed on ONGC and GAIL India Ltd. The exemption was reversed after crude began to rise from Feb. 12. Rising oil prices may increase ONGC’s subsidy burden unless Prime Minister Manmohan Singh implements a proposal to free fuel prices from state control. A plan to deregulate prices may be presented to the cabinet in six weeks.

To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com