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Oil India (OILI.BO)
Alert: 2Q: Some One-Offs, but Strong Operationally
Operationally strong 2Q — OIL’s 2QFY12 PAT came in at Rs11.4bn (+24% yoy,
+34% qoq), boosted by a combination of production growth and subsidy burden
remaining at one third. Reported PAT was, however, below estimates owing to one-off
provisions of Rs2.86bn on employee costs and higher-than-expected DD&A costs,
which also included one-offs (provision for minimum work programme) of cRs3.6bn.
No subsidy surprises; net realizations at US$86 — OIL’s 2Q net realizations came
in at US$86/bbl, and were driven by strong crude prices, lower subsidy burden
following the June price hikes and duty cuts, and upstream share remaining at a third
of gross under-recoveries (without including any notional losses). Realizations at these
levels are, however, clearly unsustainable, given rising under-recoveries of the OMCs,
worsening Gov’t finances, and the lack of political will to raise prices of controlled fuels.
Production growth continues, but near-term upsides unlikely — OIL’s 2Q crude
production came in at 0.99 MMT (+6.2% yoy, +3.6% qoq), in line with expectations.
Gas production growth was even stronger (+16.1% yoy, +5.6% qoq), on the back of
ramp-up of supplies to the NRL refinery from the Duliajan-Numaligarh pipeline.
However, with most production growth now largely behind us, we expect volumes to be
sustained at current levels in the near-term.
No clarity on subsidy sharing, 2H could be a dampener — A combination of
sustained strength in crude and sharp rupee depreciation has led to the under-recovery
situation considerably worsening in the last couple of months. Gross under-recoveries
for FY12 are unlikely to come in below Rs1.2 tr (Rs214bn in 2Q) if current trends in
crude, currency, and policy continue, considerably increasing uncertainty for the gov’towned
upstream companies for the rest of the year. A re-rating in the absence of a
reversal in trend of at least one of the above external factors is unlikely. OIL’s cash on
books at Rs136bn (Rs565/sh) could, however, provide downside support.
Oil India
Valuation
Our target price of Rs1,518 comprises: (i) Business valued at P/E of 9x Sep-12E core
EPS and (ii) cash at Rs437/share (Sep-11E). The core P/E is at a 10% discount to its
larger peer, which we believe is warranted on account of: (i) OIL's smaller size, (ii) stillto-
be-tested track record outside the North East, and (iii) risk pertaining to use of OIL's
significant cash balance. 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
The key downside risks to our investment thesis on OIL are: 1) Drop in crude prices; 2)
Sharp rupee appreciation; 3) Uncertainty on government policy on subsidy sharing
remains a key risk, although implementation of a crude linked subsidy sharing formula
would be a key positive for the stock; 4) The government determines the gas price
realization for OIL to a large extent. Any downward reduction in APM gas prices would
have negative impact on profitability and valuations; 5) 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; 6) Any reversal of the government decision on transportation tariff and
sales tax recovery would be a key negative for OIL. If any of these risk factors has a
greater downside impact than we anticipate, the share price will likely have difficulty
attaining our target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India (OILI.BO)
Alert: 2Q: Some One-Offs, but Strong Operationally
Operationally strong 2Q — OIL’s 2QFY12 PAT came in at Rs11.4bn (+24% yoy,
+34% qoq), boosted by a combination of production growth and subsidy burden
remaining at one third. Reported PAT was, however, below estimates owing to one-off
provisions of Rs2.86bn on employee costs and higher-than-expected DD&A costs,
which also included one-offs (provision for minimum work programme) of cRs3.6bn.
No subsidy surprises; net realizations at US$86 — OIL’s 2Q net realizations came
in at US$86/bbl, and were driven by strong crude prices, lower subsidy burden
following the June price hikes and duty cuts, and upstream share remaining at a third
of gross under-recoveries (without including any notional losses). Realizations at these
levels are, however, clearly unsustainable, given rising under-recoveries of the OMCs,
worsening Gov’t finances, and the lack of political will to raise prices of controlled fuels.
Production growth continues, but near-term upsides unlikely — OIL’s 2Q crude
production came in at 0.99 MMT (+6.2% yoy, +3.6% qoq), in line with expectations.
Gas production growth was even stronger (+16.1% yoy, +5.6% qoq), on the back of
ramp-up of supplies to the NRL refinery from the Duliajan-Numaligarh pipeline.
However, with most production growth now largely behind us, we expect volumes to be
sustained at current levels in the near-term.
No clarity on subsidy sharing, 2H could be a dampener — A combination of
sustained strength in crude and sharp rupee depreciation has led to the under-recovery
situation considerably worsening in the last couple of months. Gross under-recoveries
for FY12 are unlikely to come in below Rs1.2 tr (Rs214bn in 2Q) if current trends in
crude, currency, and policy continue, considerably increasing uncertainty for the gov’towned
upstream companies for the rest of the year. A re-rating in the absence of a
reversal in trend of at least one of the above external factors is unlikely. OIL’s cash on
books at Rs136bn (Rs565/sh) could, however, provide downside support.
Oil India
Valuation
Our target price of Rs1,518 comprises: (i) Business valued at P/E of 9x Sep-12E core
EPS and (ii) cash at Rs437/share (Sep-11E). The core P/E is at a 10% discount to its
larger peer, which we believe is warranted on account of: (i) OIL's smaller size, (ii) stillto-
be-tested track record outside the North East, and (iii) risk pertaining to use of OIL's
significant cash balance. 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
The key downside risks to our investment thesis on OIL are: 1) Drop in crude prices; 2)
Sharp rupee appreciation; 3) Uncertainty on government policy on subsidy sharing
remains a key risk, although implementation of a crude linked subsidy sharing formula
would be a key positive for the stock; 4) The government determines the gas price
realization for OIL to a large extent. Any downward reduction in APM gas prices would
have negative impact on profitability and valuations; 5) 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; 6) Any reversal of the government decision on transportation tariff and
sales tax recovery would be a key negative for OIL. If any of these risk factors has a
greater downside impact than we anticipate, the share price will likely have difficulty
attaining our target price.
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