ONGC’s Record Profit May Send Shares Higher, Boost Stake Sale

Oil & Natural Gas Corp. posted a record profit in the third quarter that may drive gains in the stock and increase investor confidence before a share sale likely to raise 121.2 billion rupees ($2.6 billion).

ONGC rose 1.7 percent to 1,132.90 rupees in Mumbai before the earnings announcement on Jan. 28, giving the company a market value of $53 billion. The stock dropped 12 percent this month compared with the benchmark Sensitive Index’s 10 percent decline.

“Investors will probably be positive after ONGC’s results,” said K.K. Mital, a New Delhi-based fund manager with Globe Capital Market Ltd. “Sentiment on the ONGC stock should get a boost, especially after it has dropped so much recently.”

The government plans to sell a 5 percent stake in the state-run explorer in March as Prime Minister Manmohan Singh raises funds to build roads, ports and power stations. ONGC proposes to recover royalties paid on behalf of partner Cairn India Ltd. for oil sales from India’s biggest onland oil deposit in Rajasthan in a bid to increase profit.

ONGC’s net income in the three months ended Dec. 31 more than doubled to 70.8 billion rupees, according to a statement to the Bombay Stock Exchange. Profit beat the mean estimate of 54.1 billion rupees in a Bloomberg survey of 19 analysts. Profit was helped by higher crude oil and natural gas prices and a one-time 19 billion rupee payment of dues from gas sales.

Cairn Royalty

The state-run explorer will ask the oil ministry to include royalty payments on crude oil produced from the Rajasthan block in the project cost, which can then be recovered from the sale of oil, Chairman R.S. Sharma told reporters in New Delhi yesterday. The ministry is reviewing Vedanta Resources Plc’s bid to buy a majority stake in Cairn India.

ONGC owns 30 percent in the Rajasthan block and pays royalties on the entire output, an incentive offered to attract overseas explorers to India before the government started auctioning fields in 1999.

Cairn and Vedanta need to get ONGC’s approval for the planned $9.6 billion transaction, Sharma said. ONGC decided at a board meeting Jan. 29 not to make a counterbid for Cairn India.

The ONGC stake may be sold in March, Disinvestment Secretary Sumit Bose said Jan. 21. The sale would raise $2.6 billion for the government, based on the current share price.

The company approved a special midyear dividend, a stock split and free shares for investors in December in preparation for the stake sale.

Fuel Subsidy

Citigroup Inc., Nomura Holdings Inc., Bank of America Corp., HSBC Holdings Plc, JM Financial Services Ltd. and Morgan Stanley, may manage ONGC’s share sale, two people with knowledge of the matter said Jan. 16.

New Delhi-based ONGC sold crude oil at $64.79 a barrel, an increase of 12 percent from a year earlier, according to the statement. The company supplies oil to state refiners at a discount to partially compensate them for selling fuels below cost.

The discount given in the third quarter rose 21 percent from a year earlier to 42.2 billion rupees, ONGC said.

“Investors want more clarity on how ONGC will share the subsidy burden, especially ahead of the planned follow-on offering,” said Jagdish Meghnani, an oil and gas analyst at Alchemy Share & Stock Brokers Ltd. in Mumbai. “The government has to be specific about how much subsidy ONGC will bear exactly when oil prices are trading at a particular price range.”

India more than doubled the price of natural gas produced from fields awarded to state explorers. The price was increased to 6,818 rupees per thousand cubic meters from 3,200 rupees, the first revision since 2005.

Crude oil in New York climbed 12 percent to an average of $85.24 a barrel in the three months ended Dec. 31 from a year earlier, according to data compiled by Bloomberg. Prices rose 15 percent in 2010 as demand increased from China and India.