The company's margins will come under pressure following the narrowing gap between its cost of production and its selling price. The company will declare its financial results for 2007-08 on June 25.
Even though ONGC expects to post a net profit of over Rs 15,000 crore in 2007-08 (net profit in 2006-07 was Rs 15,643 crore), analysts are not very confident of the company sustaining its performance.
While the price at which the oil major sold crude oil in 2007-08 rose 19 per cent year-on-year, the cost of producing it went up around 35 per cent during the same period.
This could have long-term implications for ONGC, as the company, along with Oil India, sells crude oil at a discount to oil refiners as a part of the government's subsidy programme. While the company should have sold its oil at an average price of $85.54 a barrel in 2007-08, it actually sold it at $52.90 a barrel, data collected from ONGC show.
ONGC gave discounts worth Rs 22,001 crore on its crude oil in 2007-08. The government has raised its discount this year to around Rs 38,000 crore.
"This (discount) could, however, be much bigger if oil prices rise. A higher burden is expected to put their profits in the first quarter of this financial year under strain. We will be cautious in recommending ONGC shares," said a Mumbai-based analyst of a broking firm.
"The rate at which the cost of production is increasing is much sharper than the rate at which our selling price of oil is growing," said ONGC Finance Director D K Sarraf. "Also, the higher discounts are putting pressure on us," he added.
The ONGC scrip on the Bombay Stock Exchange has fallen 12.79 per cent since the beginning of this year as crude oil prices continue to rise, increasing ONGC's share in the subsidy burden. "We are probably the only oil producer for whom high oil prices are not always a positive," Sarraf said.
