Financial Daily from THE HINDU group of publications
Wednesday, Jun 23, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jun 23, 2004 |
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Corporate
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Performance Columns - Microscope ONGC: A disappointing show Raghuvir Srinivasan
THE central theme of Oil and Natural Gas Corporation's (ONGC) disappointing performance in the fourth quarter of 2003-04 and the whole year is the regulatory risk that the company is subject to. Revenue and earnings have been hit badly by the Government's policy on subsidy sharing in terms of which the company had to pass on a whopping Rs 2,690 crore as discount to its buyers of crude oil, LPG and kerosene. The subsidy element accounts for 31 per cent of ONGC's post-tax earnings and 8 per cent of its net revenue for the whole of 2003-04. The company shared the subsidy on LPG and kerosene by passing on a discount of $2.35 for every barrel of crude oil that it sold and a 20 per cent discount on the price of kerosene and LPG. This had the impact of shrinking both turnover and profits for the year. The second factor that has affected ONGC is the depreciation of the dollar vis-à-vis the rupee. Given that the price of crude oil supplied by the company is determined in dollars but denominated in rupees, there was a loss in conversion due to the weak dollar. This has dented earnings by Rs 1,100 crore as per the company's own estimates. Besides, the average price of the Nigerian Bonny Light crude grade (to which ONGC's crude is benchmarked) during 2003-04 was only marginally higher at $28.95 per barrel compared to $27.74 per barrel in 2002-03. Therefore, there was almost no buoyancy possible in the turnover. Third, ONGC's production of crude oil in 2003-04 was flat at 26 million tonnes compared to the previous year. The company's efforts to boost production through improved techniques at considerable investment in the Mumbai offshore field has obviously not begun to pay off yet. Finally, the interest cost has zoomed in the fourth quarter by 90 per cent to Rs 29.22 crore; the company appears to have sought short-term accommodation from banks to smoothen the working-capital cycle. The ongoing first quarter of 2004-05 should prove to be better as average crude oil prices have been in the region of $34 per barrel. However, a lot depends on whether the subsidy-sharing scheme that lapsed with the end of 2003-04 is discontinued by the Government or revived. A decision to revive the scheme cannot but depress ONGC's earnings in the first quarter.
Some small consolation! ANY analysis of ONGC's performance in the fourth quarter of 2003-04, which shows a drop of 33 per cent in sales and 46 per cent in post-tax earnings, has to consider one major factor that impacted its financials in the fourth quarter of 2002-03. The company had finalised crude oil supply contracts with its buyers in the last quarter of 2002-03 in terms of which it was eligible for market-related prices for the crude oil supplied by it since April 1, 2002. ONGC had accounted for its supplies in 2002-03 on a provisional price of $21 per barrel. However, the average market prices for the grade of crude supplied by it averaged $30 per barrel throughout 2002-03. Following the finalisation of its supply contracts, ONGC accounted for the difference of around $9 per barrel for the entire supplies made by it during 2002-03, in the fourth quarter of that year. This caused an artificial increase in revenues and earnings (the entire difference went through straight to the bottomline) for the January- March 2003 period. Though the company disclosed this fact in its results it failed to quantify the impact on its financials. If this fact is taken into account, the comparative performance in the fourth quarter of 2003-04 will not be as bad as it appears. The overall picture of a poor performance will remain though.
More Stories on : Performance | Microscope | Petroleum
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