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Oil India (OILI.BO)
Takeaways from Mumbai - Oil India Ltd (OIL) presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
Crude production in FY12E could beat 4% growth guidance – While OIL’s FY11
crude production was negatively impacted by the longer-than-expected shutdown of
the Numaligarh refinery in 1Q, the company expects strong production growth in
FY12 on the back of higher production from both existing and new fields. OIL has
officially guided towards a crude production target of 3.76 MMT for FY12 (implying a
4.4% yoy growth); however, the company is already producing crude at a run-rate of
c3.85 MMTPA and could exit FY12 at a higher rate of c3.90-3.95 MMTPA, implying
that FY12 production growth could be much stronger than guided.
Foray into oilfield services, shale gas – OIL mgmt mentioned that as opposed to
the earlier strategy of the prospective acquisition of a conventional oil/gas producing
company, OIL is now looking to acquire: 1) an oilfield services company (national or
international) which would provide oilfield equipment (such as rigs) and/or services
(such as well logging) to both OIL and other E&P companies, and/or 2) a shale gas
asset in countries such as Argentina, Australia, or the US. The company stated that
this change has been driven by current high valuations for producing assets which
may not generate enough shareholder value. The company intends to complete at
least one such acquisition in FY12E.
Gas supplies to Numaligarh refinery ramping up – OIL commissioned the
Numaligarh-Duliajan pipeline in Mar'11, which has boosted its gas
production and sales volumes. While the company initially expected the volume
ramp-up to c1 mmscmd to take ~6 months, ramp-up has progressed at a better
pace with NRL already drawing ~0.84 mmscmd of gas. This is the key driver of the
targeted 2.63 bcm of gas production in FY12E (implying a 12.1% yoy production
growth).
Clarity on subsidy sharing mechanism awaited – While the higher upstream
subsidy share in FY11 (38.8% vs. 33.3% expected earlier) was disappointing, OIL
believes that a transparent crude-linked formula (on the lines of a slab-based
windfall tax mechanism) is the way forward. The timelines of implementation of this,
however, remain uncertain. Nearer term, we believe that crude price trends and
news flow on subsidy sharing and/or fuel price hikes would be key. We maintain
Hold..
Oil India
(OILI.BO; Rs1,267.30; 2L)
Valuation
Our target price of Rs1,466 comprises: (i) Business valued at P/E of 9x Mar-12E
core EPS and (ii) cash at Rs386/share (Mar-11E). The core P/E is at a 10%
discount. We believe a lower multiple is warranted on account of: (i) OIL's smaller
size, (ii) still-to-be-tested track record outside the North East, and (iii) risk pertaining
to use of OIL's significant cash balance, in addition to relatively higher leverage to
crude prices (thru OVL). Further re-rating from here would be dependent on higher
net crude realizations, i.e. significant price reforms esp. in diesel (full deregulation),
and any positive news flow from new exploration programs.
Risks
We rate Oil India shares Low Risk given the stable earnings profile and cash-rich
balance sheet. Drop in crude prices and sharp rupee appreciation remains the key
downside risks to earnings. Uncertainty on government policy on subsidy sharing
remains a key risk, in our opinion, although deregulation (especially of auto fuels)
and/or any clarity on this front would have a positive impact.
The government also determines the gas price realization for OIL to a large extent.
Any delay in implementation or reduction in the proposed APM gas price hike would
have negative impact on profitability and valuations. On the other hand a complete
de-regulation of gas price to the market determined levels would have a positive
impact on earnings and valuation.
Given the significant increase in exploratory activity likely to be initiated in the NELP
blocks, there are risks of failures and hence material dry well write-offs which could
impact earnings and cash flows in the short-term. However, OIL's ability to drive
exploration success in the new blocks and/or undertake a successful acquisition will
be value accretive esp. given its lower reserve base relative to ONGC.
For FY07-09, the MoPNG allowed OIL full recovery, on a net basis, of transportation
tariffs and sales tax for crude oil that it produced and transported to all public sector
refineries. Any reversal of the government decision on transportation tariff and sales
tax recovery would be a key negative for OIL.
Any of these risk factors could cause the shares to deviate from our target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India (OILI.BO)
Takeaways from Mumbai - Oil India Ltd (OIL) presented at our India Investor
Conference in Mumbai. Below are the key takeaways.
Crude production in FY12E could beat 4% growth guidance – While OIL’s FY11
crude production was negatively impacted by the longer-than-expected shutdown of
the Numaligarh refinery in 1Q, the company expects strong production growth in
FY12 on the back of higher production from both existing and new fields. OIL has
officially guided towards a crude production target of 3.76 MMT for FY12 (implying a
4.4% yoy growth); however, the company is already producing crude at a run-rate of
c3.85 MMTPA and could exit FY12 at a higher rate of c3.90-3.95 MMTPA, implying
that FY12 production growth could be much stronger than guided.
Foray into oilfield services, shale gas – OIL mgmt mentioned that as opposed to
the earlier strategy of the prospective acquisition of a conventional oil/gas producing
company, OIL is now looking to acquire: 1) an oilfield services company (national or
international) which would provide oilfield equipment (such as rigs) and/or services
(such as well logging) to both OIL and other E&P companies, and/or 2) a shale gas
asset in countries such as Argentina, Australia, or the US. The company stated that
this change has been driven by current high valuations for producing assets which
may not generate enough shareholder value. The company intends to complete at
least one such acquisition in FY12E.
Gas supplies to Numaligarh refinery ramping up – OIL commissioned the
Numaligarh-Duliajan pipeline in Mar'11, which has boosted its gas
production and sales volumes. While the company initially expected the volume
ramp-up to c1 mmscmd to take ~6 months, ramp-up has progressed at a better
pace with NRL already drawing ~0.84 mmscmd of gas. This is the key driver of the
targeted 2.63 bcm of gas production in FY12E (implying a 12.1% yoy production
growth).
Clarity on subsidy sharing mechanism awaited – While the higher upstream
subsidy share in FY11 (38.8% vs. 33.3% expected earlier) was disappointing, OIL
believes that a transparent crude-linked formula (on the lines of a slab-based
windfall tax mechanism) is the way forward. The timelines of implementation of this,
however, remain uncertain. Nearer term, we believe that crude price trends and
news flow on subsidy sharing and/or fuel price hikes would be key. We maintain
Hold..
Oil India
(OILI.BO; Rs1,267.30; 2L)
Valuation
Our target price of Rs1,466 comprises: (i) Business valued at P/E of 9x Mar-12E
core EPS and (ii) cash at Rs386/share (Mar-11E). The core P/E is at a 10%
discount. We believe a lower multiple is warranted on account of: (i) OIL's smaller
size, (ii) still-to-be-tested track record outside the North East, and (iii) risk pertaining
to use of OIL's significant cash balance, in addition to relatively higher leverage to
crude prices (thru OVL). Further re-rating from here would be dependent on higher
net crude realizations, i.e. significant price reforms esp. in diesel (full deregulation),
and any positive news flow from new exploration programs.
Risks
We rate Oil India shares Low Risk given the stable earnings profile and cash-rich
balance sheet. Drop in crude prices and sharp rupee appreciation remains the key
downside risks to earnings. Uncertainty on government policy on subsidy sharing
remains a key risk, in our opinion, although deregulation (especially of auto fuels)
and/or any clarity on this front would have a positive impact.
The government also determines the gas price realization for OIL to a large extent.
Any delay in implementation or reduction in the proposed APM gas price hike would
have negative impact on profitability and valuations. On the other hand a complete
de-regulation of gas price to the market determined levels would have a positive
impact on earnings and valuation.
Given the significant increase in exploratory activity likely to be initiated in the NELP
blocks, there are risks of failures and hence material dry well write-offs which could
impact earnings and cash flows in the short-term. However, OIL's ability to drive
exploration success in the new blocks and/or undertake a successful acquisition will
be value accretive esp. given its lower reserve base relative to ONGC.
For FY07-09, the MoPNG allowed OIL full recovery, on a net basis, of transportation
tariffs and sales tax for crude oil that it produced and transported to all public sector
refineries. Any reversal of the government decision on transportation tariff and sales
tax recovery would be a key negative for OIL.
Any of these risk factors could cause the shares to deviate from our target price.
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