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Oil India Limited
Promising road ahead
Investment rationale
Subsidy burden to remain capped, improving realisations
We believe that subsidy burden of upstream companies will remain capped
despite sharp run up in oil prices as government will strive to raise diesel
prices more frequently to keep diesel under-recoveries under check, contrary
to what it has done in past. This will help improving realisations for upstream
companies in a rising oil price environment. In our view, with no diesel price
hike, OIL's net realisations are expected to improve by USD1/bbl for every
USD10/bbl increase in oil prices and by another USD4/bbl if government
raises diesel prices by INR2/litre.
Production growth on track
Crude oil production for FY11e which remained flat in 1HFY11 due to lower
off-take by Numaligarh refinery is expected to pick up in 2HFY11. OIL guides
an oil production growth of 3-4% for the next few years. OIL projects its gas
production to grow at a CAGR of 9% for the next 4 years from 2.4bcm in
FY11 to 3.4bcm in FY15e. Commencement of Brahmaputra Gas Cracker
(BCPL) would help in meeting this target as OIL holds 10% stake in BCPL.
Domestic E&P - future growth driver
OIL has lined up USD1.9bn capex for E&P activities over next two years
including acquisitions. Of this, USD1bn will be spent in FY11 and the
remaining in FY12e. For FY12, 80% investment is planned in exploration
and appraisal and development of existing blocks. OIL has also been looking
out for potential E&P acquisitions abroad and has sufficient cash balance of
INR98bn in its books as at Sept, 2010 end. This will help OIL to strengthen
its domestic asset portfolio which was earlier concentrated in North East.
Valuation and outlook
We recommend a BUY on OIL with a target price of INR1,638/share by
applying a 11x multiple on FY12e EPS of INR142/share and accounting for
an exploration upside of INR75 on its Venezuela project.
Under-recoveries to remain capped
Following petrol price de-control and price hikes of key petroleum products in June
2010, the government reduced sector under-recoveries by INR260bn. However, recent
run up in oil prices continues to keep sector under-recoveries at an estimated INR630bn
for FY11e. We however believe that subsidy burden for upstream companies would
remain capped as government will continue to raise prices for diesel to keep diesel
under-recoveries under check, contrary to what it has done in past. Any increase,
though less likely, in cooking fuel prices, will also help in reducing the under-recoveries
following any rise in oil prices. We thus believe upstream companies to benefit from
reduction in under-recoveries, while any rise in crude oil prices will help them in
improving their net realisations
We expect OIL to post a net realisation of USD58/bbl and USD61/bbl for FY11e
and FY12e, respectively, assuming average oil price of USD75/bbl and USD80/bbl
in FY11e and FY12e, respectively.
Thus, in a rising oil price scenario, with subsidy burden remaining capped, OIL is
expected to report better net realisations. Our analysis reveals that with no diesel
price hike, OIL's net realisations are expected to improve by USD1/bbl for every
USD10/bbl increase in oil prices. Further, if government raises diesel prices by INR2/
litre, OIL's realisations would improve by a further USD4/bbl.
Production growth on track
OIL targeted to grow its oil production by 3-4% over next few years. Though oil
production remained flat in 1HFY11 due to lower off-take by Numaligarh refinery, we
estimate that it will pick up in 2HFY11. As per latest estimates, OIL projects its gas
production to grow at a CAGR of 9% for the next four years, from 2.4bcm in FY11e
to 3.4bcm in FY15e. Commencement of Brahmaputra Gas Cracker (BCPL) would
help in meeting this target as OIL holds 10% stake in BCPL. The reserve accretion
during FY10 was 9.7mmt against the target of 9.5mmt. The Reserve to production
ratio stood at 1.65x.
Domestic E&P - the future growth driver
OIL which earlier had most of its E&P assets in North East has gradually expanded its
presence to Rajasthan, Mahanadi Offshore, Mumbai Deepwater, KG as well as various
overseas projects in Venezuela, Libya, Gabon, Iran, Nigeria and Sudan. OIL plans to
increase its investment on domestic front by concentrating more on developing domestic
exploration blocks. Total USD1.9bn is lined up for investment for the next two fiscal
years. Of the total investment, INR48bn is planned for FY11 and the remaining INR37bn
for FY12e.
Nearly 80% investment is planned in exploration and appraisal and development of
existing blocks. OIL also plans to participate in downstream ventures of refining &
petrochemicals, shale gas, alternative sources of energy and CNG/CGD.
OIL plans to acquire small-medium sized producing properties with exploration upsides
to help improving its oil & gas production and portfolio of assets.
E & P progress update
Libya: The first two wells in Libya were not commercially viable and the third
exploratory well is being drilled (Block 102/4).
Gabon: 2D seismic data processing and interpretation has been completed
and currently acquisition of 3D seismic data is in progress.
Timor Leste: Drilling of the first well is expected to start by mid November.
Venezuela: The company expects to start production by end of 2013
KG Basin: 3D seismic API is under progress and efforts are being made to start
drilling of exploratory wells next year.
Mizoram: integration of 2D seismic data, Gravity-Magnetic, Geodetic Survey
data and Structural modeling is going on to identify locations for exploratory drilling.
Valuation and outlook
OIL has cash of INR101bn (INR419/share) as at 2QFY11 end, which is 30% of its
current market capitalisation. If we exclude the interest earnings and cash in hand
from valuations, then OIL is trading at a PE of 8.5x on its FY12e earnings and 4.8x
EV/EBITDA, which we believe is compelling. Comparing to ONGC, OIL is trading at
a discount of 9% on EV/EBITDA, and 5% discount to EV/boe. We recommend a BUY
on OIL with a target price of INR1,638/share by applying a 11x multiple on FY12e
EPS of INR142/share and accounting for an exploration upside of INR75 on its
Venezuela project.
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