Upstream companies get a subsidy shock

Confirming the buzz on the street, the government on Friday landed a huge blow on upstream oil companies by increasing their subsidy burden from 33.5% to 38.5%.

DNA had first reported the government’s impending move on May 18.

ONGC, along with upstream cousins Oil India and GAIL India, will now see a net outflow of Rs30,000 crore as against the earlier Rs25,700 crore to cover up for oil marketing companies’ losses.
ONGC is the worst hit of the three, paying Rs24,500 crore.

Going by experts, the move could shave as much as 7% off Oil and Natural Gas Corporation’s (ONGC) profits for last fiscal.
It could also ring the death bell of the company’s follow-on public offer, by turning away prospective participants.

An ONGC spokesperson confirmed that the oil retailer had received the news from the oil ministry.

A spokesperson at the ministry declined to comment.
“I am worried about FY11-12,” ONGC chairman A K Hazarika had said in an interview on Tuesday. “Any such proposal could turn market sentiment negative and lead to lower (government) realisation.”

“ONGC’s net realisation for FY11 goes down to $54.5/bbl (barrel) as against earlier estimate of $58.4/bbl and FY11 earnings decline by 7%,” said Jagdish Meghnani, vice-president, equity research at Mumbai-based Alchemy Share & Stock Brokers Pvt Ltd.

ONGC expects its FPO to open on July 5, under which the company is to divest 5% government holding —- bringing it down to 69.14% —- and in the process raise Rs13,000 crore.

Edgy investors, who have already hammered down the ONGC shares on Tuesday, when it recorded its biggest single-day loss since November 12, 2008, pulled the scrip down a further 1.17% to Rs274.05 on the Bombay Stock Exchange even as the benchmark Sensex ended 1.02% higher.

State-controlled oil marketing companies Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp sell fuel at government-mandated rates at fuel stations, thereby incurring huge losses. For the financial year ended March, losses at the three companies totalled Rs78,000 crore. Until now, the losses have been shared equally by the upstream oil companies, the Central government and the oil marketing companies.

Since June 25, when the government partially freed state-run oil retailers to sell fuel at their own prices, petrol prices have jumped 30% in the country, while globally crude prices have soared 49% to $112 a barrel.

The shares of both ONGC and GAIL India have trailed the broader market since the start of the year, with ONGC scrip shedding 15.25% and GAIL India falling 16.48% against a decline of 10.64% in the Sensex. Oil India Ltd scrip has performed marginally better than its peers, down 6.58% since the start of January.