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Oil India (OINL)
Energy
Weak results led by one-offs and lower oil sales. OIL reported 3QFY11 EBITDA at
`13.1 bn (-6.1% qoq, +18.7% yoy), versus our `14.4 bn estimate led by (1) provision of
`0.9 bn for pay revision and (2) lower-than-expected oil sales volumes. We have
downgraded OIL stock to ADD from BUY previously noting a moderate 14% upside to
our revised 12-month target price of `1,490 (`1,630 previously). We find the current
valuations compelling with stock trading at 9X FY2012E EPS and 4X FY2012E EBITDA.
Key downside risk stems from higher-than-expected subsidy from higher crude price.
3QFY11 net income at `9.1 bn (+26.6% yoy, -1.2% qoq); our estimate was `9.7 bn
OIL reported 3QFY11 net income at `9.1 bn (+26.6% yoy, -1.2% qoq), versus our estimate of
`9.7 bn. The lower-than-expected earnings despite lower subsidy burden at `5.6 bn (our estimate
was `5.8 bn) reflects (1) provision of `0.9 bn for pay revision of employees accounted under
‘other expenditure’, (2) lower crude sales at 0.91 mn tons versus our estimate of 0.96 mn tons and
(3) higher-than-expected employee cost at `2.9 bn versus our estimate of `2.4 bn due to revision
in pay. Reported EBITDA was at `13.1 bn (-6.1% qoq, +18.7% yoy); higher yoy EBITDA reflects (1)
higher net realized price at US$67.1/bbl (+US$8.4/bbl yoy) and (2) revision in APM gas price.
Valuations attractive; stock discounting 43% sharing by upstream companies
We find OIL’s valuations attractive with the stock trading at 9X FY2012E EPS and 4X EV/EBITDA.
We have downgraded the stock to ADD from BUY previously with a revised target price of `1,490
(`1,630 previously) based on 10X FY2012E EPS plus value of investments. The change in target
price reflects downward revision of our FY2012E EPS estimate for OIL to reflect no diesel
deregulation in FY2012E. We do not see any significant downside risk from current levels as the
stock price reflects a scenario of upstream companies bearing 43% of gross under-recoveries.
FY2011E EPS of `136 is achievable; `97 achieved in 9MFY11
We do not see significant risk to our FY2011E EPS of `136 given that the company has already
achieved an EPS of `97 in 9MFY11 (`37.8 in 3QFY11). We assume a higher subsidy burden at `8.9
bn in 4QFY11E versus `5.6 bn to reflect higher gross under-recoveries qoq resulting from (1)
higher crude oil prices and (2) unchanged retail prices for diesel, kerosene and LPG. We estimate
FY2012E EPS at `145 assuming (1) no diesel deregulation, (2) crude prices at US$85/bbl, (3) no
change in retail prices and (4) upstream companies bearing 33.3% of gross under-recoveries.
Fine-tuned FY2011-13E EPS estimates
We have revised our FY2011-13E EPS to `136 (-6.4%), `145 (-8.8%) and `163 (-1.3%) to reflect
(1) higher crude price assumption for FY2011E, (2) higher under-recoveries in FY2012E as we
expect a delay in diesel deregulation to FY2013E, (3) 3QFY11 results and (4) other minor changes.
Key highlights of 3QFY11 results
Net realized price for crude oil. OIL’s 3QFY11 net realized crude price was US$67.1/bbl
versus US$63.2/bbl in 2QFY11 and US$58.8/bbl in 3QFY10. OIL’s subsidy burden in
3QFY11 was `5.6 bn or US$18.5/bbl in crude price oil equivalent terms versus crude price
equivalent of US$12.3/bbl in 2QFY11 and US$15.1/bbl in 3QFY10.
Decline in crude sales volumes. 3QFY11 crude sales volume declined by 1.6% yoy and
4% qoq to 0.91 mn tons on account of lower off-take by customers.
Increase in gas sales volumes. 3QFY11 gas sales volume increased 8.4% qoq to 479
mcm. The lower off-take in 2QFY11 was due to a shutdown taken by several key
customers in Assam and Rajasthan.
DD&A expenses 24% higher qoq. DD&A expenses increased 24% qoq to `2.3 bn in
line with our estimate. The company has written off `813 mn on account of dry wells in
3QFY11 versus `476 mn in 2QFY11 and `35 mn in 3QFY10. The company has accounted
for dry wells in Libya in 3QFY11.
Other expenditure 40% higher qoq and yoy. Other expenditure increased to `1.7 bn
from `1.2 bn in 2QFY11 and 3QFY10; 18.5% higher than our estimate of `1.5 bn. The
company has made a one-off provision of `940.2 mn for pay revision of employees
relating to previous years.
Other income 67% higher qoq. Other income increased to `2.8 bn versus `1.7 bn in
2QFY11; our estimate was `2.5 bn. Other income included a one-off of `514.5 mn for
revision of transportation tariffs for reverse pumping sector relating to previous years.
Interim dividend. The company has declared an interim dividend of `18/share.
Key assumptions behind our earnings model
We discuss our key assumptions behind our earnings model below. Exhibit 2 gives the major
assumptions behind our earnings model and Exhibit 3 gives sensitivity of OIL’s EPS to key
variables (rupee-dollar rate, crude oil price, natural gas price).
Subsidy amount. We model subsidy amount for FY2011E, FY2012E and FY2013E at
`25.8 bn, `27.9 bn and `18 bn. We now assume diesel deregulation to be implemented
from FY2013E versus our earlier assumption of 3QFY12E. We assume that upstream
companies will bear one-third of total under-recoveries. This is in line with the subsidy
sharing of upstream companies in 9MFY11. We note that share of upstream companies
has been 29-31% in the last three years. The share of OIL India was at 10.8% in 9MFY11
among the upstream companies.
Oil and gas volumes. We model crude oil sales volumes at 3.59 mn tons in FY2011E,
3.69 mn tons in FY2012E and 3.77 mn tons in FY2013E versus 3.48 mn tons in FY2010.
We model gas volumes at 5.1 mcm/d for FY2011E, 6 mcm/d in FY2012E and 7 mcm/d in
FY2013E versus 5.1 mcm/d for FY2010. Implementation of EOR/IOR techniques in OIL’s
existing producing fields will likely contribute to higher volumes.
Crude oil price assumption. We model FY2011E, FY2012E and FY2013E crude oil
(Dated Brent) price at US$83/bbl, US$85/bbl and US$85/bbl. However, we would focus
more on OIL’s net realized crude price and our long-term crude price assumption. Exhibit
4 gives OIL’s historical net realized price and our expectations for FY2011E (US$62.1/bbl),
FY2012E (US$62.9/bbl) and FY2013E (US$70.7/bbl).
Natural gas price assumption. We model FY2011E, FY2012E and FY2013E natural gas
price at `6.8/cu m, `7.5/cu m and `7.5/cu m to reflect the government’s decision to
increase the price of APM gas from June 1, 2010.
Exchange rate assumption. We model exchange rate for FY2011E, FY2012E and
FY2013E at `45.6/US$, `45.5/US$ and `44/US$.
Earnings revision
FY2011E. We have revised our FY2011E EPE to `136 versus `145 earlier. The downward
revision reflects (1) lower net crude price realization at US$62.1/bbl versus US$64.6/bbl
previously on account of higher subsidy loss, (2) modestly lower oil production to reflect
production in 3QFY11, (3) higher employee cost on account of pay revision and (4) lower
other income.
FY2012E. We have revised our FY2012E EPE to `145 versus `159 earlier. The downward
revision reflects (1) no diesel deregulation in FY2012E versus our earlier assumption of it
being implemented by 3QFY12E, (2) higher employee cost on account of pay revision and
(3) lower other income.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India (OINL)
Energy
Weak results led by one-offs and lower oil sales. OIL reported 3QFY11 EBITDA at
`13.1 bn (-6.1% qoq, +18.7% yoy), versus our `14.4 bn estimate led by (1) provision of
`0.9 bn for pay revision and (2) lower-than-expected oil sales volumes. We have
downgraded OIL stock to ADD from BUY previously noting a moderate 14% upside to
our revised 12-month target price of `1,490 (`1,630 previously). We find the current
valuations compelling with stock trading at 9X FY2012E EPS and 4X FY2012E EBITDA.
Key downside risk stems from higher-than-expected subsidy from higher crude price.
3QFY11 net income at `9.1 bn (+26.6% yoy, -1.2% qoq); our estimate was `9.7 bn
OIL reported 3QFY11 net income at `9.1 bn (+26.6% yoy, -1.2% qoq), versus our estimate of
`9.7 bn. The lower-than-expected earnings despite lower subsidy burden at `5.6 bn (our estimate
was `5.8 bn) reflects (1) provision of `0.9 bn for pay revision of employees accounted under
‘other expenditure’, (2) lower crude sales at 0.91 mn tons versus our estimate of 0.96 mn tons and
(3) higher-than-expected employee cost at `2.9 bn versus our estimate of `2.4 bn due to revision
in pay. Reported EBITDA was at `13.1 bn (-6.1% qoq, +18.7% yoy); higher yoy EBITDA reflects (1)
higher net realized price at US$67.1/bbl (+US$8.4/bbl yoy) and (2) revision in APM gas price.
Valuations attractive; stock discounting 43% sharing by upstream companies
We find OIL’s valuations attractive with the stock trading at 9X FY2012E EPS and 4X EV/EBITDA.
We have downgraded the stock to ADD from BUY previously with a revised target price of `1,490
(`1,630 previously) based on 10X FY2012E EPS plus value of investments. The change in target
price reflects downward revision of our FY2012E EPS estimate for OIL to reflect no diesel
deregulation in FY2012E. We do not see any significant downside risk from current levels as the
stock price reflects a scenario of upstream companies bearing 43% of gross under-recoveries.
FY2011E EPS of `136 is achievable; `97 achieved in 9MFY11
We do not see significant risk to our FY2011E EPS of `136 given that the company has already
achieved an EPS of `97 in 9MFY11 (`37.8 in 3QFY11). We assume a higher subsidy burden at `8.9
bn in 4QFY11E versus `5.6 bn to reflect higher gross under-recoveries qoq resulting from (1)
higher crude oil prices and (2) unchanged retail prices for diesel, kerosene and LPG. We estimate
FY2012E EPS at `145 assuming (1) no diesel deregulation, (2) crude prices at US$85/bbl, (3) no
change in retail prices and (4) upstream companies bearing 33.3% of gross under-recoveries.
Fine-tuned FY2011-13E EPS estimates
We have revised our FY2011-13E EPS to `136 (-6.4%), `145 (-8.8%) and `163 (-1.3%) to reflect
(1) higher crude price assumption for FY2011E, (2) higher under-recoveries in FY2012E as we
expect a delay in diesel deregulation to FY2013E, (3) 3QFY11 results and (4) other minor changes.
Key highlights of 3QFY11 results
Net realized price for crude oil. OIL’s 3QFY11 net realized crude price was US$67.1/bbl
versus US$63.2/bbl in 2QFY11 and US$58.8/bbl in 3QFY10. OIL’s subsidy burden in
3QFY11 was `5.6 bn or US$18.5/bbl in crude price oil equivalent terms versus crude price
equivalent of US$12.3/bbl in 2QFY11 and US$15.1/bbl in 3QFY10.
Decline in crude sales volumes. 3QFY11 crude sales volume declined by 1.6% yoy and
4% qoq to 0.91 mn tons on account of lower off-take by customers.
Increase in gas sales volumes. 3QFY11 gas sales volume increased 8.4% qoq to 479
mcm. The lower off-take in 2QFY11 was due to a shutdown taken by several key
customers in Assam and Rajasthan.
DD&A expenses 24% higher qoq. DD&A expenses increased 24% qoq to `2.3 bn in
line with our estimate. The company has written off `813 mn on account of dry wells in
3QFY11 versus `476 mn in 2QFY11 and `35 mn in 3QFY10. The company has accounted
for dry wells in Libya in 3QFY11.
Other expenditure 40% higher qoq and yoy. Other expenditure increased to `1.7 bn
from `1.2 bn in 2QFY11 and 3QFY10; 18.5% higher than our estimate of `1.5 bn. The
company has made a one-off provision of `940.2 mn for pay revision of employees
relating to previous years.
Other income 67% higher qoq. Other income increased to `2.8 bn versus `1.7 bn in
2QFY11; our estimate was `2.5 bn. Other income included a one-off of `514.5 mn for
revision of transportation tariffs for reverse pumping sector relating to previous years.
Interim dividend. The company has declared an interim dividend of `18/share.
Key assumptions behind our earnings model
We discuss our key assumptions behind our earnings model below. Exhibit 2 gives the major
assumptions behind our earnings model and Exhibit 3 gives sensitivity of OIL’s EPS to key
variables (rupee-dollar rate, crude oil price, natural gas price).
Subsidy amount. We model subsidy amount for FY2011E, FY2012E and FY2013E at
`25.8 bn, `27.9 bn and `18 bn. We now assume diesel deregulation to be implemented
from FY2013E versus our earlier assumption of 3QFY12E. We assume that upstream
companies will bear one-third of total under-recoveries. This is in line with the subsidy
sharing of upstream companies in 9MFY11. We note that share of upstream companies
has been 29-31% in the last three years. The share of OIL India was at 10.8% in 9MFY11
among the upstream companies.
Oil and gas volumes. We model crude oil sales volumes at 3.59 mn tons in FY2011E,
3.69 mn tons in FY2012E and 3.77 mn tons in FY2013E versus 3.48 mn tons in FY2010.
We model gas volumes at 5.1 mcm/d for FY2011E, 6 mcm/d in FY2012E and 7 mcm/d in
FY2013E versus 5.1 mcm/d for FY2010. Implementation of EOR/IOR techniques in OIL’s
existing producing fields will likely contribute to higher volumes.
Crude oil price assumption. We model FY2011E, FY2012E and FY2013E crude oil
(Dated Brent) price at US$83/bbl, US$85/bbl and US$85/bbl. However, we would focus
more on OIL’s net realized crude price and our long-term crude price assumption. Exhibit
4 gives OIL’s historical net realized price and our expectations for FY2011E (US$62.1/bbl),
FY2012E (US$62.9/bbl) and FY2013E (US$70.7/bbl).
Natural gas price assumption. We model FY2011E, FY2012E and FY2013E natural gas
price at `6.8/cu m, `7.5/cu m and `7.5/cu m to reflect the government’s decision to
increase the price of APM gas from June 1, 2010.
Exchange rate assumption. We model exchange rate for FY2011E, FY2012E and
FY2013E at `45.6/US$, `45.5/US$ and `44/US$.
Earnings revision
FY2011E. We have revised our FY2011E EPE to `136 versus `145 earlier. The downward
revision reflects (1) lower net crude price realization at US$62.1/bbl versus US$64.6/bbl
previously on account of higher subsidy loss, (2) modestly lower oil production to reflect
production in 3QFY11, (3) higher employee cost on account of pay revision and (4) lower
other income.
FY2012E. We have revised our FY2012E EPE to `145 versus `159 earlier. The downward
revision reflects (1) no diesel deregulation in FY2012E versus our earlier assumption of it
being implemented by 3QFY12E, (2) higher employee cost on account of pay revision and
(3) lower other income.
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