Macquarie Research: Oil India: Buy for 1796 target

Oil India
Value has no boundaries
Event
 Oil India earlier this year took up a 3.5% stake in the Carabobo-1 project
(Venezuela) as part of a consortium. As more details have become available, and
based on our discussions with company management, we believe it is a mediumterm
earnings growth opportunity for Oil India (OPL). Further, OIL stands to gain
from the proposed 10% hike in APM gas prices to non-power/fertilizer sectors,
expected from FY12. We raised our TP by ~14% and reiterate our OP rating.
Impact
 Carabobo is located in the highly prospective Orinoco basin (Venezuela).
The Carabobo projects are located in the highly prospective Orinoco basin,
which is characterised by low-depth (implying low lifting costs) heavy oil in the
easier Miocene stage of strata. Carabobo blocks have a total 128 bn bbls of inplace
reserves and are expected to produce at rates of 400kbpd each.
 3.5% stake in Carabobo-1 project adds US$1bn to Oil India’s value. The
Venezuelan heavy-oil project, Carabobo-1, has recoverable reserves of 3bn
bbls and is estimated to start production of ~14kbpd by 2012-end. Despite low
realizations of the heavy oil (which needs chemical treatment), we believe
overall low investment and drilling costs (~US$14/bbl in total) and an attractive
fiscal regime (nil export taxes, etc) make it an excellent prospect for Oil India.
 Potential ~10% gas price hike on 30% of volumes. Gas prices were recently
doubled to US$ 4.2/mmBTU for fertiliser and power consumers – 70% of gas
offtake. For the balance 30% industrial users (sponge iron, petrochem, etc)
prices have remained steady for a few years at US$4.75/mmbtu. The petroleum
minister proposes a ~10% hike to US$5.25/mmbtu. We have raised FY12E
PAT by 2%. Gas accounts for ~40% of Oil India’s sales.
 Oil India may mildly benefit from potential diesel de-regulation: Diesel is
the largest petroleum product, accounting for 36% of India’s FY11E oil
subsidy (Fig 9). Given falling inflation, the government may de-regulate diesel
ahead of its proposed divestment in ONGC slated for Jan-March 2011, which
we estimate could give 5–7% upside to Oil India in the best-case scenario.
Earnings and target price revision
 A ~2% increase in PAT from FY12 onward. TP increased to Rs1,796/sh.
Price catalyst
 12-month price target: Rs1,796.00 based on a DCF methodology.
 Catalyst: Diesel deregulation; upside from Rajasthan; potential acquisitions.
Action and recommendation
 We recommend a switch from ONGC. OIL India quotes at similar valuations
as ONGC but enjoys the world’s lowest finding and developmental cost of
US$4.2/bbl, amongst the highest reserve replacement ratio of 169% and a
low EV/reserves of 11/bbl. Besides, we estimate its volume growth is poised
to accelerate from 5% pa currently, while ONGC struggles to maintain existing
volumes.