Subsidy burden for selling petroleum products below market cost has haunted country’s largest oil

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explorer ONGC. The Maharatna on Thursday reported a 24.5 per cent dip in its net profit in April to June quarter of the current financial year.

ONGC reported Rs 3,661 crore as profit after tax in the first quarter (Q1) of this fiscal compared with Rs 4,848 crore in the same period last year. The explorer shelled out Rs 5,515 crore as subsidy for oil marketing companies in the quarter. In the last financial year, it had shared only Rs 429 crore for subsidy in Q1.

ONGC is not the only state-run oil company stressed by higher subsidy burden in Q1. Largest oil marketer, IOC reported a net loss of Rs 3,388.39 crore in the first quarter, while, HPCL also met with a loss of Rs 1,884.29 crore in the same period. Second largest government-owned explorer Oil India also recorded a 32.25 per cent drop in net profit in Q1 this fiscal when compared with a year ago period.

Market observers expect better numbers from the oil companies in the second quarter. “De-regulation of petrol prices and hike in the price of other petroleum products will be accounted in the second quarter of the fiscal. They should help the oil companies to post better results,” said Jigar Shah, vice-president of equity sales at Motilal Oswal Securities.

From an investor’s angle, one should look at how the remaining subsidy burden is shared and how prepared is the government to pass one any rise in retail prices, Shah explained. One will have to look at oil companies from a long-term prospective, he added.

R S Sharma, chairman and managing director of ONGC also indicated that less subsidy sharing in second quarter and rise in the price natural gas sold under administered price mechanism (APM) will help his company post better results.

The increase in APM price to $4.2 per million British thermal unit (mBtu) will add Rs 1,500-1,600 crore to ONGC’s top line from June this year.

ONGC’s net realisation on every barrel of crude oil in Q1 has come down to $48.04 from $58.25 in the same period previous year. The explorer was also impacted by Rs 862 crore due to depreciation in rupee value. The forex exchange ration of rupee to dollar in April-June this year was Rs 45.67, while it was Rs 48.67 in first quarter of 2009-10.

At present, ONGC is prucing 62 billion cubic metres (bcm) of gas per day. “It is expected to go up to 100 bcm by 2016,” Sharma said. New production of more than 15 bcm will come from its block B-12 and C-24 in the western coast by 2014-15. And rest is expected to come from Krishna Godavari (KG) basin by 2016.

ONGC produced 6.06 million metric tonnes (MMT) of crude oil in the first quarter this year, compared with 6.12 MMT in the corresponding period last year.

The explorer’s gas production touched 5.76 bcm in this quarter, while it was 5.75 bcm in Q1 last year.