ONGC Profit Unexpectedly Drops as Government Orders Higher Subsidy Payout

Oil & Natural Gas Corp., India’s biggest energy explorer, unexpectedly posted a drop in fourth- quarter profit after the government ordered it to pay more to refiners including Indian Oil Corp. to cap fuel prices.

Net income in the three months ended March 31 fell 26 percent to 27.9 billion rupees ($619 million), the New Delhi- based company said in a statement to the Bombay Stock Exchange yesterday. The average profit estimate of 22 analysts in a Bloomberg survey was 51.3 billion rupees.

The government increased the subsidy payable by state-owned explorers as global crude oil rose to keep diesel, kerosene and cooking gas prices unchanged and curb inflation in world’s second-fastest growing major economy. The payments and cash compensation from the government helped Indian Oil, the nation’s largest refiner, to post earnings that exceeded analysts’ expectations.

“Subsidy is the overarching factor that’s depressing the value of these companies and has a big effect on profits,” said Jagdish Meghnani, a Mumbai-based oil and gas analyst at Alchemy Share & Stock Brokers. “The government has to come out with some kind of formula for subsidy. At some point of time, fuel prices will have to be freed. Till then, these companies will continue to be undervalued.”

ONGC was asked to pay 248.9 billion rupees in the form of discounts to state refiners in the year ended March 31, according to the statement. The subsidy hurt fourth-quarter profit by 69.7 billion rupees, ONGC said.

Crude Prices

Indian Oil posted a 30 percent decline in profit to 39.1 billion rupees. The average estimate of 13 analysts surveyed by Bloomberg was a profit of 32.4 billion rupees. Sales increased 31 percent to 868.8 billion rupees, the fastest pace since September 2008.

Crude oil in New York climbed 20 percent to an average of $94.60 a barrel in the three months ended March 31 from a year earlier, according to data compiled by Bloomberg. Prices averaged $98.88 a barrel this year and reached a high of $113.93 on April 29.

ONGC fell 2 percent to 271.95 rupees at 9:20 a.m. in Mumbai trading. Indian Oil climbed 0.9 percent to 322.45 rupees. The benchmark Sensitive Index rose 0.4 percent.

Subsidy Burden

The share of subsidies for exploration companies including ONGC and Oil India Ltd. (OINL) was increased to 38.8 percent of the total in the last fiscal year from 33 percent previously, Chairman A.K. Hazarika told reporters in New Delhi yesterday. The increased burden resulted in gas transporter GAIL India Ltd. (GAIL)’s fourth-quarter profit falling for the first time in six quarters.

The government may increase fuel prices to ease the subsidy burden and help it sell shares in ONGC as part of a plan to raise 400 billion rupees this year for social welfare projects. The share sale may start on July 5, Hazarika said.

Citigroup Inc. (C), Nomura Holdings Inc. (8604), Bank of America Corp., HSBC Holdings Plc (HSBA), JM Financial Services Ltd. and Morgan Stanley, may manage ONGC’s share sale, two people with knowledge of the matter said Jan. 16.

ONGC is seeking to buy oil and gas deposits in Canada, Kazakhstan and Russia as it plans to get the equivalent of 60 million metric tons of oil from overseas by 2025, or more than double its output from ageing fields in India. The company lost a bid to buy Exxon Mobil Corp. (XOM)’s 25 percent stake in an offshore oil field in Angola, two people familiar with the matter said March 14.

Refining Margin

Indian Oil accounted for 109.4 billion rupees as compensation from the government for selling fuels below cost in the quarter, compared with 106.9 billion rupees a year earlier, according to the statement.

The average gross refining margin in the quarter was $7.85 a barrel compared with $3.38 a year earlier, according to the company’s earnings statement.

The New Delhi-based refiner currently has debt of 678.8 billion rupees compared with 527.3 billion rupees at the end of March, Chairman R.S. Butola said in New Delhi yesterday. Indian Oil plans to sell dollar-denominated bonds this year, finance director P.K. Goyal said. The amount and timing haven’t been decided yet, he said.

Indian Oil increased gasoline prices this month by 5 rupees a liter in New Delhi, the most since June 2008. A panel of ministers may allow the refiner to raise diesel prices next month to narrow revenue losses, an official at the oil ministry said May 26.

Indian Oil’s smaller state rivals reported higher profit after getting compensation. Hindustan Petroleum Corp.’s earnings rose 48 percent to 11.2 billion rupees and Bharat Petroleum Corp. posted a 33 percent increase in net income to 9.35 billion rupees.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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