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Oil India Ltd.
Initiation
Underweight
OILI.BO, OINL IN
Declining returns: Initiating with Underweight rating
• Initiating coverage with Underweight rating and Sept-11 PT of
Rs1,200: We initiate coverage on Oil India, India’s second-largest SOE
upstream company, with an Underweight rating. In view of its aging
assets, high cash balances, and lower returns on incremental
investments, we expect Oil India’s ROE to decline by 480bp over the
next three years, which will affect stock performance, in our view.
• Producing assets are mature/declining: Oil India’s key North East
Indian assets have been in production for 15-20 years. Oil already
produced from these fields is 1.5x existing 2P reserve base, implying
that high recovery ratios have been achieved and that incremental
recovery will be expensive and development upside is limited.
• Regulatory risk continues to be significant: OIL’s earnings are
leveraged to fuel sector reforms. We estimate a 10% change in subsidy
estimates will affect OIL’s earnings by 5%. We currently assume
Rs21.9-14.5 billion subsidy-sharing for OIL over FY11-13 based on a
c.12% upstream subsidy share (33%).
• Catalysts and share price drivers: Delays in the implementation of
auto fuel deregulation and ad-hoc changes in the subsidy-sharing regime
would likely have a negative impact on earnings and sentiment. We
expect the stock to be driven by news flow on policy initiatives and
possible reserve accretion.
which is at a 10% discount to regional peers. We believe Indian SOE
companies should trade at a discount to regional peers due to the ad-hoc
policy environment. Key risks to our negative view emanate from a more
progressive government policy initiative on fuel pricing and subsidy
sharing, as well as any significant exploration success.
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