Lower Subsidy Provision In Budget May Put The Burden On ONGC, Oil India
Shares of ONGC and Oil India have fallen more than 10 percent from their last highs.
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Lower-than-expected provision for fuel subsidies in the Budget for 2018-19 raises the possibility of putting the burden back on state-run oil explorers if crude price stays above $55 a barrel.
The provision of Rs 21,800 crore in 2017-18 and Rs 20,800 crore in the next financial year as subsidy for under-recoveries on cooking fuels, including the Direct Benefit Transfer on LPG, is lower than the estimates of Rs 25,900 crore and Rs 30,000 crore based on global crude prices of $57.5 a barrel and $60, respectively, in the given period, according to a report by Kotak Institutional Equities. The shortfall raises concern on the possibility of subsidy sharing with the upstream companies in the fourth quarter ended March and the financial year starting April, as was the case till September 2015 when global crude prices averaged above $57 a barrel, the report said.
Shares of Oil and Natural Gas Corporation Ltd. declined more than 10 percent in the last seven straight sessions. Oil India Ltd. stock fell nearly 12 percent in six sessions. The explorers used to share the subsidy burden with the government to keep oil prices low for consumers. That’s because the upstream companies gained from high crude prices. The practice stopped after auto fuels—petrol and diesel—were deregulated and pegged to market rates a little over two years ago. The subsidy continued on kerosene and LPG but was reduced in phases.
With the crude around $71 dollars a barrel, the highest in four years, there are concerns that the upstream companies may be asked to compensate oil marketers for their under-recoveries stemming from selling kitchen fuels below the cost of production. Any such decision would impact their earnings.
The earnings per share estimates for ONGC and Oil India for the next financial year may decline by 14 percent and Rs 24 percent, respectively, at $60 a barrel of crude if the government does not raise provision of subsidy, Kotak said. It expects risks to the state-run explorers’ earnings to remain an overhang on their stock prices till the results for quarter ending March when clarity on subsidy-sharing may emerge.
Calls and text messages to spokespersons of ONGC and Oil India remained unanswered.