ongc punished for being good

The good news

ONGC has struck oil and gas in three places; but is it any good for the shareholders? Sounds weird, but the company is being punished for doing well over the past years. 

The bad news

The largest shareholder in the company is taking a ride at the cost of minority shareholders; reminds me of those classic conflicts in corporate finance. 

As per the company's 2010-11 annual report, although the average crude oil price was $85.09 per barrel (22% higher than previous year), due to subsidy burden borne (82% share), the net realization was at $53.77 per barrel. This is about 37% marked down. The subsidy burden was Rs.248.92 billion. 

I am not able to read the 2011-12 annual report as the pdf version is pathetic. However, as per the financial results presentation, the subsidy borne by ONGC is Rs.444.66 billion (more than $8 billion).

For the nine-month period ended 31 Dec 2012 the burden is Rs.371.08 billion. As per the presentation the total subsidy shared by ONGC from 1 April 2003 to 31 Dec 2012 is about Rs.2,040.23 billion (about $40 billion).

The reporting

The company's revenue is shown net of these subsidies in the financial statements. Nowhere in the income statement it is disclosed clearly. It would be more appropriate for the investors to see the income statement as follows for instance:

Unusual risk in the business

In addition to the oil price risk and exploration risks inherent in the business, the company has an unusual risk of subsidy sharing. If oil marketing companies are in pain, the medication costs are footed by the upstream companies. This is ridiculous. Why can't the two be kept separate? If the government wants to subsidize, why should it charge the minority shareholders of the upstream? 

The key beneficiaries of high oil prices are usually the upstream companies. In fact, they thrive when prices go up and suffer when prices are down. This is a key incentive for them to be in the business.

However, for the upstream companies in India, the story is shockingly different. High crude price is like a double-edged sword for the company; One, the input costs of business go up; Two, the subsidy demand from the controlling shareholder is higher which makes the net realization lower, much lower. The incentive to be in the exploration business is snatched away. Heck!

The game of subsidizing the crucial petroleum products is a farce, anyway. Let's wait for the 2012-13 annual report; I hope that it is at least readable.