A prime candidate for share buyback, the Great Eastern Shipping Co (Gesco) stock price has been languishing around the Rs 20 mark. The current bout of recession in the industry has taken its toll and commensurately, Gesco has posted below par results for the half year ended September, 1998. All the more reflected in the operating margins eroding to 33 per cent from 39 per cent. During the period, the company shelved its plans to sell vessels owing largely to the depressed second hand market. The sale of three dry bulk carriers and one derrick lay barge had proven to be lucrative (Rs 24.87 crore) in the previous fiscal.

Income from operations has risen by 21.89 per cent to Rs 459.54 crore while the bottomline has eroded by 24 per cent to Rs 68.81 crore in the first half of this fiscal. Other income as a percentage of profit before tax seems to be high at 44.8 per cent (28 per cent in the corresponding period last year). Owing to the delivery of two minibulk carriers, one harbour tug andone pilot vessel in the period, depreciation has risen to Rs 77 crore from Rs 69.11 crore.

The performance of the offshore division has been better owing to the deployment of three offshore vessels and four harbour tugs. Moreover, the company has garnered lucrative drilling contracts from ONGC. These were responsible for operating profits from the offshore division rising by 17.5 per cent to Rs 32.4 crore.

Moreover, the offshore market should continue to be buoyant owing to the opening up of the oil sector. Despite the sluggish real estate sector, the property development division has had an operating profit of Rs 35.27 crore, which is higher by 39 per cent. This is because Gesco's cost of construction was down by around 15 per cent owing to reduced prices of steel and cement.

The company has been continuously plagued by the decreased bulk and liner freight rates. This resulted in operating profits from the shipping division reducing by 18 per cent to Rs 127.14 crore. Though the dry bulk freight marketcrashed further due to the Asian crisis, Gesco was helped by the tanker market holding firm in the first quarter. But for improved tanker rates, the realisation from this division would have been abysmal.

Gesco opted for more voyage charters, where revenues are higher, but had to bear all expenses such as port charges and bunkers. This was responsible in inflating total expenditure to Rs 307.37 crore from Rs 227.02 crore. Even in the second half the uncertainty pertaining to the demand in the dry bulk segment is bound to remain. Moreover, the major Asian trades of iron ore, metallurgical coal, steel products and grain are expected to drop or stay flat for some time to come. But the impending crop failure in Australia and the floods in China could open up new business opportunities for Gesco. The company is slated to get delivery of two Aframax (105000 dwt) tankers in February and April, but the gains from these would be reflected only next year.

ONGC

Despite the drop in oil prices to a ten yearlow, higher realisations from natural gas and LPG have seen ONGC's operating margins rising from 15.43 per cent in the first half of 1997-98 to 17.6 per cent in the first half of the current year. The total production for oil, gas and LPG was 13.8 million tonnes, 10.11 million cubic metres and 565 thousand metric tonnes, which is nearly the same as that of last year's first half. This is despite a partial shut-down for 22 days for the commissioning of the second pipeline and the six day gas supply cut due to damage caused by floods.

Nevertheless commissioning of the second pipeline helped the company to form a grid network connecting Bombay high, South Bassein, Hajira and Uran. With the commissioning of the second pipeline the capacity of line has been enhanced to 41 million cubic meters per day. The present supply of the gas is still 35 million cubic meters of gas. But the grid enabled the company to better manage the supply demand mismatch of natural gas, which resulted in reduced flaring and highersales. Further the decline at Neelam Oil fields was arrested with production being at 2.5 million tonnes.

The company is confident of achieving a target production from Bombay high of 19.1 million tonnes of oil and supply 14,150 million cubic meters of natural gas to produce 1.03 million tonnes of LPG, 1.48 million tonnes of NGL and 570 thousand tonnes of ethane and propane. Even with crude price reigning at $ 12 per barrel, which is approximately 50 per cent lower than last year prices, the depreciation of rupee by 18 per cent has mitigated the effect on topline for ONGC. Secondly, natural gas prices have been increased by Rs 150/MCM from 1996-97.

The bottomline has risen by 11.6 per cent. This is partly due to reduction in the depreciation charges as for the last four years approximately Rs 450 crore has been written on dry wells. These charges are being reduced due to the major part written off in the earlier years.

Although the first well in deep sea water did not yield any returns, the company isstill maintaining a success : failure ratio of 3:2 for striking oil in new wells. Compared to a ratio of 1:10 for MNCs, ONGC's performance looks impressive.

But the problem is more wells do not necessarily add up to reserves. The production rate does increase. The company says that so far, new reserves have been added at the rate of depletion due to consumption. But this has to increase further if the company wants to establish itself as a major E&P company.

(With contributions from AG Krishnan and Manish Saxena)