>OIL AND NATURAL GAS CORPORATION LTD (INDIABULLS)

Mixed results, lower sales compensated by lower subsidy burden

Oil and Natural Gas Corporation Ltd.'s (ONGC's) net sales were down 25.8% yoy to Rs.148.8 bn in Q1’10, on account of a drop in production volumes, lower price realisations (USD 58 per barrel vs. USD 69 per barrel in Q1’09), and the discontinuation of the trading of MRPL products since April 2009. However, the EBITDA margin stood at 64.3%, improving by 567 bps yoy due to lower subsidy burden, which was down 95.6% yoy to Rs. 4.3 bn. Also, employee costs were down 13% yoy to Rs. 2.5 bn. Net profit, however, declined 26.5% to Rs. 48.5 bn, mainly due to an increase in DD&A expenses related to the cost of two dry wells written-off in the KG offshore basin.

Proposed subsidy-sharing formula provides relief – The Secretary of Petroleum recently announced that under-recoveries on the sale of domestic LPG and kerosene will be borne by the Government. This has brought enough reasons to cheer for upstream companies such as ONGC.
At current exchange rates and crude oil prices hovering at around USD 70 per barrel, Oil Marketing Companies (OMCs) are expected to incur around Rs. 300 bn of under-recoveries on the sale of LPG and kerosene.

Delay in production, cause for concern – Three platforms that were to come up in fiscal FY09 were delayed and the delay continued into the first quarter as well, leading to a decline in the expected production. Though production from one of the projects, C-Series, is likely to start soon, the other two platforms may be delayed further.

To see full report: ONGC