Bloomberg News

ONGC Bets Higher Fuel Prices Will Cut Subsidy, Boost Profit

July 29, 2011

(Updates with share price in fifth paragraph.)

July 29 (Bloomberg) -- Oil & Natural Gas Corp., India’s biggest energy explorer, is betting higher local fuel prices will reduce discounts given to state-run refiners and help to boost profit.

The company’s subsidy bill has dropped by about 500 million rupees ($11.3 million) daily after the government raised fuel prices and cut taxes on crude last month, Finance Director D.K. Sarraf said yesterday after ONGC posted first-quarter earnings that missed analyst estimates.

“The positive impact of higher fuel prices will be felt from this quarter,” said Arindam Pal, a Mumbai-based senior research analyst at Asian Market Securities Pvt. “The impact could increase ONGC’s oil selling price about 10 percent.”

ONGC supplies oil to state refiners at a discount to help compensate them for fuels sold below cost in a bid to curb inflation in the second-fastest growing major economy. India’s government plans to divest a 5 percent stake in the explorer as part of asset sales aimed at raising 400 billion rupees this fiscal year to fund infrastructure and social welfare projects.

ONGC declined 1.9 percent to 272.05 rupees at 9:29 a.m. in Mumbai. The stock has declined 16 percent this year compared with an 11 percent drop in the benchmark Sensitive Index.

The government increased prices of diesel, kerosene and cooking fuel on June 25 for the first time in a year in a bid to reduce losses at state refiners.

Oil Prices

“The government’s decision should mean better profitability in the next few quarters,” ONGC Chairman A.K. Hazarika said in New Delhi yesterday. “We hope the government maintains the percentage of subsidy we pay and oil doesn’t rise higher than it is now.”

Higher oil prices increase the losses of state refiners from selling fuels below cost. State oil explorers including ONGC and Oil India Ltd. currently bear about 33 percent of the total fuel subsidy bill.

State-run ONGC posted a 12 percent increase in net income to 40.95 billion rupees in the three months ended June 30, the New Delhi-based company said in a statement. The median profit estimate of 21 analysts surveyed by Bloomberg was 42.4 billion rupees. Sales rose 19 percent to 162.7 billion rupees.

Profit would have increased by 68.8 billion rupees in the quarter if discounts hadn’t been given to refiners, Sarraf said.

The explorer sold crude at $48.76 a barrel in the first quarter, an increase of 1.5 percent from a year earlier, according to the statement. The discount given to state refiners doubled from a year earlier to 120.5 billion rupees.

Overseas Assets

A higher subsidy bill limits ONGC’s gains from rising crude prices. Crude oil in New York rose 31 percent to an average of $102.34 a barrel in the three months ended June 30 from a year earlier, according to data compiled by Bloomberg.

ONGC is seeking energy assets overseas to take advantage of higher oil prices. Potential acquisitions include oil sands stakes in Canada and Exxon Mobil Corp.’s stake in Kazakhstan’s Kashagan oil field in a joint bid with GAIL India Ltd., the country’s biggest gas distributor.

ONGC trades at 7 times fiscal 2012 earnings and is one of 10 stocks that may increase about 50 percent over the next two years if domestic economic and regulatory conditions improve, analysts led by Sanjeev Prasad at Kotak Institutional Equities said in a note July 27.

--Editors: John Chacko, Amanda Jordan

To contact the reporter on this story: Rakteem Katakey in New Delhi at

To contact the editor responsible for this story: Amit Prakash at

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