Royalty blow to ONGC leaves energy stocks edgy

Tags: News
A Gujarat high court order asking ONGC to pay the Gujarat government around Rs 5,000 crore in royalty for the crude oil it extracted since 2008 shaved off nearly 2 per cent from the stock on Monday.

A division bench on Saturday told the upstream energy firm to pay up the royalty deficit worth Rs 5,000-6,000 crore within two months and also pay royalty henceforth to the state government at market rate, a PTI report said.

The stock opened weak and hit an intra-day low of Rs 287.50 before recovering slightly to end the day at Rs 293.90, down 1.54 per cent from the previous close. The scrip had gained in the previous three trading sessions.

There was no confirmation of the court directive from the company, neither did it make any disclosure to the two stock exchanges till Monday evening.

Mayur Matani, oil & gas analyst at ICICI Securities, told Financial Chronicle that the development had raised worries that other states may follow suit, dealing a big blow to not only ONGC but also the other PSU upstream firm, Oil India.

Shares of OIL declined 3.82 per cent to end at Rs 465.05 on Monday. As per the Oil Field Act 1948, the holder of an oil mining lease is required to pay 20 per cent royalty on the sale price of crude it extracts from oil blocks in the state.

Since ONGC started providing crude to IndianOil at a discounted rate from 2004 as per the subsidy-sharing mechanism of the central government, it started paying royalty to the state government at post-discount rate, resulting in a drastic fall in royalty to the state. In 2011, the state government filed a petition at the high court, stating that it should be paid royalty at market rate and the difference in royalty payment since 2008 at pre-discount rate (in comparison to market rate) was computed at Rs 5,000 crore to 6,000 crore, a PTI report said.

The court has now directed ONGC to pay royalties on onshore crude production at the gross billing rate instead of the post-subsidy billing rate. “The royalty payment at market rate would hurt the upstream firm going forward, as crude now hovers around $110 a barrel,” Matani said.

Rikesh Parikh of Motilal Oswal Securities said, “We believe the firm will appeal against the court order.”

Calling the development a near-term headwind, Somshankar Sinha of Barclays India in a report said, “We expect ONGC to appeal. The one-time impact of Rs 10,000 crore or nearly Rs 8 per share and the Rs 1.9 per share hit to recurring earnings puts about Rs 26 per share or 9 per cent of market value at risk.”

“We await further clarity on this matter and until then maintain our estimates and ‘accumulate’ rating on the stock with a target price of Rs 318,” Angel Broking said in a note.

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