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Oil India
Subsidy gatecrashes the crude party
Event
Oil India reported a PAT of Rs9.08bn, which was 4% below estimates due to
higher than expected subsidy burden, and was a decline of 1% QoQ despite
the sharp run up in crude prices. Despite concerns on subsidy, we believe Oil
India has the best operational matrix amongst the Indian upstream sector due
to its low costs. We reiterate our Outperform recommendation, with a new
target price of Rs1,710 (earlier Rs1,796).
Impact
Gas production (+6% QoQ) continues to ramp-up back to earlier levels:
Natural gas production of Oil India increased 0.62bcm, from 0.58bcm in 2Q
and 0.55bcm in 1Q; thus returning to the levels before Numaligarh refinery
had a major shutdown during the monsoons. Crude production at 0.92 MMT
was flat QoQ but up 3% YoY.
Subsidy of Rs5.58bn; Net crude realizations of ~US$67.1/bbl up 6% QoQ:
Upstream firms have one-third of gross industry under-recoveries, implying
crude/LPG discounts in the order of Rs52bn for the quarter, and Rs156bn for
9MFY11. OINL has given discounts of Rs5.58bn, which would imply 10.7% of
total upstream subsidy share, in line with past trends (see Fig 3). Crude
realizations have therefore been reduced by ~ US$18.5/bbl to land up at
US$67.1/bbl, growth of only 6% QoQ.
EBITDA down 6% QoQ to Rs13.2bn; Higher other income fills in: On a
QoQ basis, flat sales due to the effect of subsidies failed to offset the 9%
growth in operating expenditure; resulting in EBITDA declining to Rs13.1bn.
However, increased Other income offset the decline partially due to a 67%
rise to Rs2.8bn.
Earnings and target price revision
FY11E PAT increased by 3%. TP decreased to Rs1,710 (-4.8%) due to higher
long-term subsidy, and the recent relinquishment of two onshore oil blocks in
the Sirte basin in Libya, where Oil India was the operator, due to poor
prospectively.
Price catalyst
12-month price target: Rs1,710.00 based on a Sum of Parts methodology.
Catalyst: Clarity on subsidy sharing mechanism, diesel price hike.
Action and recommendation
Lowest cost producer: At
Development costs globally; which is a key advantage it has over its regional
peers. While the subsidy may play spoilsport in the near term, Oil and Natural
Gas Corporation’s (ONGC IN, Rs1,190.30, Neutral, TP: Rs1,177.00) FPO
should also indirectly benefit Oil India as any policy announcements shall be
equally applicable to both Indian upstream PSUs. The stock is trading at an
EV/1P reserves multiple of US$10/bbl vs a global average of ~US$18/bbl. We
maintain Outperform
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India
Subsidy gatecrashes the crude party
Event
Oil India reported a PAT of Rs9.08bn, which was 4% below estimates due to
higher than expected subsidy burden, and was a decline of 1% QoQ despite
the sharp run up in crude prices. Despite concerns on subsidy, we believe Oil
India has the best operational matrix amongst the Indian upstream sector due
to its low costs. We reiterate our Outperform recommendation, with a new
target price of Rs1,710 (earlier Rs1,796).
Impact
Gas production (+6% QoQ) continues to ramp-up back to earlier levels:
Natural gas production of Oil India increased 0.62bcm, from 0.58bcm in 2Q
and 0.55bcm in 1Q; thus returning to the levels before Numaligarh refinery
had a major shutdown during the monsoons. Crude production at 0.92 MMT
was flat QoQ but up 3% YoY.
Subsidy of Rs5.58bn; Net crude realizations of ~US$67.1/bbl up 6% QoQ:
Upstream firms have one-third of gross industry under-recoveries, implying
crude/LPG discounts in the order of Rs52bn for the quarter, and Rs156bn for
9MFY11. OINL has given discounts of Rs5.58bn, which would imply 10.7% of
total upstream subsidy share, in line with past trends (see Fig 3). Crude
realizations have therefore been reduced by ~ US$18.5/bbl to land up at
US$67.1/bbl, growth of only 6% QoQ.
EBITDA down 6% QoQ to Rs13.2bn; Higher other income fills in: On a
QoQ basis, flat sales due to the effect of subsidies failed to offset the 9%
growth in operating expenditure; resulting in EBITDA declining to Rs13.1bn.
However, increased Other income offset the decline partially due to a 67%
rise to Rs2.8bn.
Earnings and target price revision
FY11E PAT increased by 3%. TP decreased to Rs1,710 (-4.8%) due to higher
long-term subsidy, and the recent relinquishment of two onshore oil blocks in
the Sirte basin in Libya, where Oil India was the operator, due to poor
prospectively.
Price catalyst
12-month price target: Rs1,710.00 based on a Sum of Parts methodology.
Catalyst: Clarity on subsidy sharing mechanism, diesel price hike.
Action and recommendation
Lowest cost producer: At
Development costs globally; which is a key advantage it has over its regional
peers. While the subsidy may play spoilsport in the near term, Oil and Natural
Gas Corporation’s (ONGC IN, Rs1,190.30, Neutral, TP: Rs1,177.00) FPO
should also indirectly benefit Oil India as any policy announcements shall be
equally applicable to both Indian upstream PSUs. The stock is trading at an
EV/1P reserves multiple of US$10/bbl vs a global average of ~US$18/bbl. We
maintain Outperform
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