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Oil India Ltd -On track for over 20% profit rise in FY11
„3Q recurring profit up 31% and 9M up 8% YoY; Retain Buy
OIL India’s (OIL) 3Q recurring profit is up 31% YoY driven by higher oil price net
of subsidy and more than doubling of the APM gas price. OIL’s 9M recurring profit
is 8% YoY higher. 3Q profit of OIL is 17% lower than our expectation but we still
expect over 20% YoY rise in its FY11E profit. We retain our Buy on OIL.
3Q profit rise driven by higher oil and gas price realization
The 31% YoY rise in 3Q recurring profit is driven by higher oil and gas price. OIL’s
gas price more than doubled YoY to US$4.2/mmbtu. OIL’s 3Q oil price net of
subsidy, at US$67.1/bbl, is 14% YoY higher. In rupee terms, its 3Q oil price is
10% YoY higher. 3Q profit of OIL is 17% lower than expected by us mainly due to
its oil & gas sales volumes being lower than expected. 3Q oil sales volume is up
1% YoY while gas volume is 1% YoY lower. We expected stronger volume rise.
3Q net oil price at US$67.1/bbl, up 14% YoY and 6% QoQ
OIL’s 3Q oil price net of subsidy, at US$67.1/bbl is 14% YoY higher than
US$58.8/bbl in 3Q FY10 and 6% QoQ higher than US$63.2/bbl in 2Q FY11. OIL’s
net oil price was US$49.7/bb in 1Q FY11. It is up sharply to US$63-67/bbl in 2Q
and 3Q due to decline in subsidy following hefty fuel price hikes in June 2010.
FY11E earnings kept unchanged; 21% YoY rise expected
To achieve our FY11 profit estimate, OIL’s 4Q profit (Rs8bn) would have to be
91% YoY higher on the low base of 4Q FY10 and 9% QoQ lower. Strong YoY
jump in 4Q earnings appears imminent driven by higher oil & gas price. We
expect OIL’s 4Q net oil price to be over US$65/bbl vis-à-vis US$53.3/bbl in 4Q
FY10. Thus we expect OIL’s FY11 profit to be over 20% YoY higher and hence
have kept our FY11 estimate, implying 21% YoY rise, unchanged.
Price objective basis & risk
Oil India Ltd (XLCRF)
Our sum-of-the-parts PO of Rs1,598 includes the DCF value of its 2P reserves
(Rs1,113), best-case resources (Rs18) and exploration upside (Rs64). It also
includes net cash (Rs354), value of the product pipeline on an EV/EBITDA basis
(Rs28) and investments at cost (Rs20). We have used a WACC of 13.6pct to
calculate DCF value. The DCF value is based on a long-term Brent price forecast
of US$85/bbl. However, given our subsidy assumptions, the PO is effectively
based on oil price realization net of subsidy of US$63.5/bbl. We think that DCF is
the most appropriate measure to value E&P assets. Downside risks are (1)
Standard oil and gas industry operating risks, which include exploration,
development and production risks, oil price fluctuations, currency risk and reserve
estimation, (2) sovereign risks, which include changes in the government and/or
policies (e.g., withdrawal of the tax holiday), which may have a direct impact on
the business, cash flow and profit, (3) OIL's subsidy hit being higher than
assumed by us, (4) terrorist attacks in North East India, causing significant
damage to OIL's installations and facilities. Upside risks are: (1) Reforms that
permanently reduce or eliminate OIL's subsidy hit, (2) Large oil or gas discovery
leading to significant reserve and value accretion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India Ltd -On track for over 20% profit rise in FY11
„3Q recurring profit up 31% and 9M up 8% YoY; Retain Buy
OIL India’s (OIL) 3Q recurring profit is up 31% YoY driven by higher oil price net
of subsidy and more than doubling of the APM gas price. OIL’s 9M recurring profit
is 8% YoY higher. 3Q profit of OIL is 17% lower than our expectation but we still
expect over 20% YoY rise in its FY11E profit. We retain our Buy on OIL.
3Q profit rise driven by higher oil and gas price realization
The 31% YoY rise in 3Q recurring profit is driven by higher oil and gas price. OIL’s
gas price more than doubled YoY to US$4.2/mmbtu. OIL’s 3Q oil price net of
subsidy, at US$67.1/bbl, is 14% YoY higher. In rupee terms, its 3Q oil price is
10% YoY higher. 3Q profit of OIL is 17% lower than expected by us mainly due to
its oil & gas sales volumes being lower than expected. 3Q oil sales volume is up
1% YoY while gas volume is 1% YoY lower. We expected stronger volume rise.
3Q net oil price at US$67.1/bbl, up 14% YoY and 6% QoQ
OIL’s 3Q oil price net of subsidy, at US$67.1/bbl is 14% YoY higher than
US$58.8/bbl in 3Q FY10 and 6% QoQ higher than US$63.2/bbl in 2Q FY11. OIL’s
net oil price was US$49.7/bb in 1Q FY11. It is up sharply to US$63-67/bbl in 2Q
and 3Q due to decline in subsidy following hefty fuel price hikes in June 2010.
FY11E earnings kept unchanged; 21% YoY rise expected
To achieve our FY11 profit estimate, OIL’s 4Q profit (Rs8bn) would have to be
91% YoY higher on the low base of 4Q FY10 and 9% QoQ lower. Strong YoY
jump in 4Q earnings appears imminent driven by higher oil & gas price. We
expect OIL’s 4Q net oil price to be over US$65/bbl vis-à-vis US$53.3/bbl in 4Q
FY10. Thus we expect OIL’s FY11 profit to be over 20% YoY higher and hence
have kept our FY11 estimate, implying 21% YoY rise, unchanged.
Price objective basis & risk
Oil India Ltd (XLCRF)
Our sum-of-the-parts PO of Rs1,598 includes the DCF value of its 2P reserves
(Rs1,113), best-case resources (Rs18) and exploration upside (Rs64). It also
includes net cash (Rs354), value of the product pipeline on an EV/EBITDA basis
(Rs28) and investments at cost (Rs20). We have used a WACC of 13.6pct to
calculate DCF value. The DCF value is based on a long-term Brent price forecast
of US$85/bbl. However, given our subsidy assumptions, the PO is effectively
based on oil price realization net of subsidy of US$63.5/bbl. We think that DCF is
the most appropriate measure to value E&P assets. Downside risks are (1)
Standard oil and gas industry operating risks, which include exploration,
development and production risks, oil price fluctuations, currency risk and reserve
estimation, (2) sovereign risks, which include changes in the government and/or
policies (e.g., withdrawal of the tax holiday), which may have a direct impact on
the business, cash flow and profit, (3) OIL's subsidy hit being higher than
assumed by us, (4) terrorist attacks in North East India, causing significant
damage to OIL's installations and facilities. Upside risks are: (1) Reforms that
permanently reduce or eliminate OIL's subsidy hit, (2) Large oil or gas discovery
leading to significant reserve and value accretion.
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