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We hosted investor meetings with the OIL India (OIL) management – Mr. T.K Ananth
Kumar, Director (Finance). Following are the key takeaways on key issues:
Utilisation of cash flows and acquisition: OIL is in advance talks for potential
overseas acquisition of producing property in the African region. The company is
likely to give a non-binding agreement for the same in the next 2-3 months. The
reserve is around 200m barrels and the potential acquisition cost is around
Rs50-60bn, translating into EV/boe of US$4.8-5.8/boe. The same compares
favourably to the opportunity cost (F&D cost of US$5.45/bbl in FY11).
Possible options for divestment of government stake: Management believes
the preferred option for the divestment of government stake is likely to be
block-trade, wherein the government offloads its stake to the institutional
investor.
Subsidy sharing mechanism: OIL expects government to provide minimum net
realisation of around US$60/bbls for the current fiscal. The company has asked
the government to take average of the last five years for calculating the
proportionate share of upstream companies against the current practice of last
three year’s average.
Outlook: OIL has been delivering impressive performance on the core operating
parameters such as production growth, coupled with efficient operations,
resulting in low finding, development and lifting cost. Key catalysts affecting the
stock price continues to be subsidy sharing and outlook with regards to
deployment of significant cash balance. The stock is currently trading at
attractive 7.3x FY2013E EPS. We continue to maintain ‘Accumulate’ on the
stock, with a target price of Rs1,525/share (a multiple of 10x FY2013E EPS).
Key takeaway of the interactions with OIL India
management
Utilisation of cash flows and acquisition
With regards to utilisation of the significant cash balance available with the
company, OIL is in advance talks for potential overseas acquisition of producing
property in the African region. The company is likely to give a non-binding
agreement for the same in the next 2-3 months. The reserve of the potential target
is around 200m barrels and the potential acquisition cost is around Rs50-60bn. The
same translates into EV/boe of US$ 4.8-5.8/boe. The same compares favourably to
the opportunity cost (F&D cost of US$5.45/bbl in FY11).
The likely production from the asset under discussion is likely to be around
15,000bpd to 20,000bpd (around 25% of the current production). Thus, acquisition
of the producing asset is likely to lead to reduction in concentration risk for OIL
(largely operating in North East). The likely valuation associated with acquisition is
likely to have material implication on the stock price.
Management believes that the acquisition is likely to be value-accretive as the
company works with minimum IRR of 14.0% while examining the acquisition
prospects vis-à-vis interest yield of around 10.5% earned on the cash with the
company.
While the management refrained from providing the acquisition target, we believe
the Maurel & Prom’s oil assets in Gabon has similar data point as disclosed by the
management for the potential target. Even the OIL’s interest in the same has been in
news for some time. As per the news reports, OIL has done the due-diligence and is
likely to approach E-GoM for the approval of the deal shortly. Given the smaller size
of the asset under contention the competition from the bigger Chinese players is
also not significant.
Apart from the conventional Oil & Gas segment, OIL is also for the acquisition in the
non-conventional hydrocarbon segment, such as shale gas, for strategic benefits.
Possible options for divestment of government stake
Management highlights those potential options likely for the government
disinvestment in OIL is contingent on couple of factors - successful ONGC issue and
market conditions.
OIL management believes the preferred option for the divestment of the
government stake is likely to be block-trade in which government will offload its
stake to institutional investor. Talking about the prospects of cross-holding,
management said that large part of the current cash balance is likely to be spent on
overseas acquisition of the producing property. Company is currently working on
couple of acquisitions, with ticket size of around Rs50-60bn each. Management
believes that its recent interaction with the government has also acknowledged the
fact that company’s cash needs to be utilised for the inorganic growth prospects of
the company rather than for the purpose of cross-holdings.
Subsidy sharing
OIL’s management acknowledged that the subsidy-sharing continues to be an
overhang with regards to the upstream companies. However, it expects government
to provided minimum net realisation of around US$60/bbls for the current fiscal.
Management estimates a capex outlay of around Rs160-180bn over the period of
next five years and to fund the same, it requires government support in the form of
limited subsidy burden.
With regards to sharing of the subsidy burden amongst the upstream companies, OIL
highlighted that it has asked the government to take average of the last five years for
calculating the proportionate share of upstream companies against the current
practice of last three year’s average.
Last year, the subsidy-sharing formula for upstream companies was changed, with
companies requiring to share subsidy based on last three years average profit ratio
rather than last one year’s profit ratio. The same was done to incentivise the
efficient player. The move has resulted into OIL benefitting to the tune of around
Rs4.5bn for FY11.
Exploration portfolio update
On the exploratory front, OIL believes it has an exciting portfolio, wherein key
prospects are Assam Arakan basin (Mizoram Block) followed by KG onshore field on
the domestic front, while on the overseas front, it believes Gabon offers good
prospects.
Despite being one of the oldest discovered hydrocarbon basins, Assam-Arakan basin
has lots of hydrocarbon yet to be discovered. However, the key challenges for the
same remains to be logistical issues with regards to exploration at the difficult
geographical locations.
With exploratory drilling likely to happen in the current year in these key blocks, the
blocks are likely to be keenly watched for the upsides to the reserve estimates.
Crude Oil Production, operating cost and capex update
Management believes the average production during the year is likely to be around
3.9MMT, resulting into a growth of around 5-6% adjusted for the lower NRL offtake
for FY2011. Crude oil production for FY2013E is estimated to be around 4.1MMT,
resulting into a growth of around 5.0% over FY2012 from the domestic fields. The
increase in the production is likely to occur due to various EOR/IOR activities
undertaken by the company and incremental production from horizontal wells.
On the operating cost front, management expects the cost of production to remain
in the range of around US$5.25-5.5/bbls. The same is in line with historical averages.
RRR is expected to continue to remain over one, going forward.
With regards to capex, OIL is likely to step on the gas with capex during the current
year and is likely to increase significantly to Rs31.8bn as compared to capex of
Rs20bn. The significant increase in capex is largely on account of increase in planned
outlay for the 3D seismic and exploratory drilling for FY2012E. Management
estimates a capex outlay of around Rs160-180bn over the period of next five years.
Management highlighted that despite spending around Rs1.7bn against the budget
expenditure of around Rs31.8bn, it is likely to meet the capex plan. In a recent
meeting called by PMO to look at the progress of growth, OIL has maintained its
guidance of capex of around Rs31.8bn for the year.
Outlook and Valuation
OIL has underperformed the benchmark indices over the last one year owing to
headwinds in the form of lack of subsidy-sharing mechanism. Recent concerns over
the diversion of the cash towards cross-holding as a means to fund the government
disinvestment programme could be traced to stock price decline over last couple of
months.
Post the duty cuts in June 2011; we had highlighted the fact that government is likely
to add back the duty cuts in order to determine the subsidy burden for the upstream
companies. The same was largely due to significant likely increase in net realisation
of upstream oil producers in absence of the move. Government, thereafter, had also
advocated for introduction of a step-ladder subsidy-sharing mechanism in order to
restrict net realisation of the upstream companies in the band of US$55-65/bbls.
Despite the duty cuts, the under-recoveries for the current fiscal has remained at
elevated levels on account of significant depreciation of the rupee, coupled with
higher crude oil prices. The same results into check on the higher net realisation of
the PSU upstream oil producing companies. Thus, we assume a 40% upstream
sharing for FY12E and FY13E against the implied 45% in case of foregone duty add
backs for the current year.
On the cash deployment front, we believe post the acquisition of the producing
property in Africa, coupled with production from Carabobo-1, overseas volumes
would form around 40% of OIL India’s current volumes. Markets in general have
accorded a premium valuation to ONGC vis-à-vis OIL due to its overseas presence
(ONGC Videsh) and better balance sheet composition due to lower proportion of the
cash on the book. Thus, the value accretive overseas acquisition is likely to improve
the business model
On the operating front, OIL has been delivering impressive performance on the core
operating parameters such as production growth, coupled with efficient operations,
resulting in low finding, development and lifting cost. High proportion of the
developed 1P reserves continues to act as a comforting factor for the production
growth. We believe this, coupled with healthy and consistent reserve replacement
ratios and strong reserve base, holds company in good state.
On the valuation front, the stock is currently trading at attractive 7.3x FY2013E EPS
and 1.3x FY2013E Book Value. On EV/boe of US$5.3/bbl (1P) and US$2.8/bbl (2P),
the stock incorporates the risk of lower realisations due to higher subsidy and offers
a favour risk-reward equation at the current juncture. We value OIL at 10x FY2013E
EPS, arriving at a fair value estimates of Rs1,525/share. We continue to maintain
‘Accumulate’ rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted investor meetings with the OIL India (OIL) management – Mr. T.K Ananth
Kumar, Director (Finance). Following are the key takeaways on key issues:
Utilisation of cash flows and acquisition: OIL is in advance talks for potential
overseas acquisition of producing property in the African region. The company is
likely to give a non-binding agreement for the same in the next 2-3 months. The
reserve is around 200m barrels and the potential acquisition cost is around
Rs50-60bn, translating into EV/boe of US$4.8-5.8/boe. The same compares
favourably to the opportunity cost (F&D cost of US$5.45/bbl in FY11).
Possible options for divestment of government stake: Management believes
the preferred option for the divestment of government stake is likely to be
block-trade, wherein the government offloads its stake to the institutional
investor.
Subsidy sharing mechanism: OIL expects government to provide minimum net
realisation of around US$60/bbls for the current fiscal. The company has asked
the government to take average of the last five years for calculating the
proportionate share of upstream companies against the current practice of last
three year’s average.
Outlook: OIL has been delivering impressive performance on the core operating
parameters such as production growth, coupled with efficient operations,
resulting in low finding, development and lifting cost. Key catalysts affecting the
stock price continues to be subsidy sharing and outlook with regards to
deployment of significant cash balance. The stock is currently trading at
attractive 7.3x FY2013E EPS. We continue to maintain ‘Accumulate’ on the
stock, with a target price of Rs1,525/share (a multiple of 10x FY2013E EPS).
Key takeaway of the interactions with OIL India
management
Utilisation of cash flows and acquisition
With regards to utilisation of the significant cash balance available with the
company, OIL is in advance talks for potential overseas acquisition of producing
property in the African region. The company is likely to give a non-binding
agreement for the same in the next 2-3 months. The reserve of the potential target
is around 200m barrels and the potential acquisition cost is around Rs50-60bn. The
same translates into EV/boe of US$ 4.8-5.8/boe. The same compares favourably to
the opportunity cost (F&D cost of US$5.45/bbl in FY11).
The likely production from the asset under discussion is likely to be around
15,000bpd to 20,000bpd (around 25% of the current production). Thus, acquisition
of the producing asset is likely to lead to reduction in concentration risk for OIL
(largely operating in North East). The likely valuation associated with acquisition is
likely to have material implication on the stock price.
Management believes that the acquisition is likely to be value-accretive as the
company works with minimum IRR of 14.0% while examining the acquisition
prospects vis-à-vis interest yield of around 10.5% earned on the cash with the
company.
While the management refrained from providing the acquisition target, we believe
the Maurel & Prom’s oil assets in Gabon has similar data point as disclosed by the
management for the potential target. Even the OIL’s interest in the same has been in
news for some time. As per the news reports, OIL has done the due-diligence and is
likely to approach E-GoM for the approval of the deal shortly. Given the smaller size
of the asset under contention the competition from the bigger Chinese players is
also not significant.
Apart from the conventional Oil & Gas segment, OIL is also for the acquisition in the
non-conventional hydrocarbon segment, such as shale gas, for strategic benefits.
Possible options for divestment of government stake
Management highlights those potential options likely for the government
disinvestment in OIL is contingent on couple of factors - successful ONGC issue and
market conditions.
OIL management believes the preferred option for the divestment of the
government stake is likely to be block-trade in which government will offload its
stake to institutional investor. Talking about the prospects of cross-holding,
management said that large part of the current cash balance is likely to be spent on
overseas acquisition of the producing property. Company is currently working on
couple of acquisitions, with ticket size of around Rs50-60bn each. Management
believes that its recent interaction with the government has also acknowledged the
fact that company’s cash needs to be utilised for the inorganic growth prospects of
the company rather than for the purpose of cross-holdings.
Subsidy sharing
OIL’s management acknowledged that the subsidy-sharing continues to be an
overhang with regards to the upstream companies. However, it expects government
to provided minimum net realisation of around US$60/bbls for the current fiscal.
Management estimates a capex outlay of around Rs160-180bn over the period of
next five years and to fund the same, it requires government support in the form of
limited subsidy burden.
With regards to sharing of the subsidy burden amongst the upstream companies, OIL
highlighted that it has asked the government to take average of the last five years for
calculating the proportionate share of upstream companies against the current
practice of last three year’s average.
Last year, the subsidy-sharing formula for upstream companies was changed, with
companies requiring to share subsidy based on last three years average profit ratio
rather than last one year’s profit ratio. The same was done to incentivise the
efficient player. The move has resulted into OIL benefitting to the tune of around
Rs4.5bn for FY11.
Exploration portfolio update
On the exploratory front, OIL believes it has an exciting portfolio, wherein key
prospects are Assam Arakan basin (Mizoram Block) followed by KG onshore field on
the domestic front, while on the overseas front, it believes Gabon offers good
prospects.
Despite being one of the oldest discovered hydrocarbon basins, Assam-Arakan basin
has lots of hydrocarbon yet to be discovered. However, the key challenges for the
same remains to be logistical issues with regards to exploration at the difficult
geographical locations.
With exploratory drilling likely to happen in the current year in these key blocks, the
blocks are likely to be keenly watched for the upsides to the reserve estimates.
Crude Oil Production, operating cost and capex update
Management believes the average production during the year is likely to be around
3.9MMT, resulting into a growth of around 5-6% adjusted for the lower NRL offtake
for FY2011. Crude oil production for FY2013E is estimated to be around 4.1MMT,
resulting into a growth of around 5.0% over FY2012 from the domestic fields. The
increase in the production is likely to occur due to various EOR/IOR activities
undertaken by the company and incremental production from horizontal wells.
On the operating cost front, management expects the cost of production to remain
in the range of around US$5.25-5.5/bbls. The same is in line with historical averages.
RRR is expected to continue to remain over one, going forward.
With regards to capex, OIL is likely to step on the gas with capex during the current
year and is likely to increase significantly to Rs31.8bn as compared to capex of
Rs20bn. The significant increase in capex is largely on account of increase in planned
outlay for the 3D seismic and exploratory drilling for FY2012E. Management
estimates a capex outlay of around Rs160-180bn over the period of next five years.
Management highlighted that despite spending around Rs1.7bn against the budget
expenditure of around Rs31.8bn, it is likely to meet the capex plan. In a recent
meeting called by PMO to look at the progress of growth, OIL has maintained its
guidance of capex of around Rs31.8bn for the year.
Outlook and Valuation
OIL has underperformed the benchmark indices over the last one year owing to
headwinds in the form of lack of subsidy-sharing mechanism. Recent concerns over
the diversion of the cash towards cross-holding as a means to fund the government
disinvestment programme could be traced to stock price decline over last couple of
months.
Post the duty cuts in June 2011; we had highlighted the fact that government is likely
to add back the duty cuts in order to determine the subsidy burden for the upstream
companies. The same was largely due to significant likely increase in net realisation
of upstream oil producers in absence of the move. Government, thereafter, had also
advocated for introduction of a step-ladder subsidy-sharing mechanism in order to
restrict net realisation of the upstream companies in the band of US$55-65/bbls.
Despite the duty cuts, the under-recoveries for the current fiscal has remained at
elevated levels on account of significant depreciation of the rupee, coupled with
higher crude oil prices. The same results into check on the higher net realisation of
the PSU upstream oil producing companies. Thus, we assume a 40% upstream
sharing for FY12E and FY13E against the implied 45% in case of foregone duty add
backs for the current year.
On the cash deployment front, we believe post the acquisition of the producing
property in Africa, coupled with production from Carabobo-1, overseas volumes
would form around 40% of OIL India’s current volumes. Markets in general have
accorded a premium valuation to ONGC vis-à-vis OIL due to its overseas presence
(ONGC Videsh) and better balance sheet composition due to lower proportion of the
cash on the book. Thus, the value accretive overseas acquisition is likely to improve
the business model
On the operating front, OIL has been delivering impressive performance on the core
operating parameters such as production growth, coupled with efficient operations,
resulting in low finding, development and lifting cost. High proportion of the
developed 1P reserves continues to act as a comforting factor for the production
growth. We believe this, coupled with healthy and consistent reserve replacement
ratios and strong reserve base, holds company in good state.
On the valuation front, the stock is currently trading at attractive 7.3x FY2013E EPS
and 1.3x FY2013E Book Value. On EV/boe of US$5.3/bbl (1P) and US$2.8/bbl (2P),
the stock incorporates the risk of lower realisations due to higher subsidy and offers
a favour risk-reward equation at the current juncture. We value OIL at 10x FY2013E
EPS, arriving at a fair value estimates of Rs1,525/share. We continue to maintain
‘Accumulate’ rating on the stock.
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