Expect step jump in gas production in 2014
INR60b earmarked for acquisitions; 1QFY13P subsidy at USD56/bbl
Expect 1QFY13 provisional subsidy at USD56/bbl which translates into upstream
sharing of 30% for the quarter.
Delay in cash deployment is hurting return ratios; however, management indicated it
is likely to announce an acquisition soon and has earmarked INR60b for the same.
Planned capex for FY13 is INR33.8b with a target to drill 40/37 exploratory/
development wells (v/s 16/22 in FY12).
We continue to like Oil India due to its (a) high share of oil (58% in 1P and 64% in 2P)
in its reserves, and (b) RRR of >1 for last 8 years to deliver consistent production
growth. Maintain Buy with target price of INR565
We attended the Oil India analyst meet for an update on ongoing operations and
future growth strategy. Key takeaways:
1QFY13 provisional subsidy burden at USD56/bbl
Management indicated a provisional subsidy of USD56/bbl guidance from the
government for 1QFY13. This translates into upstream sharing of 30% for
1QFY13. However, we believe that similar to previous years, subsidy sharing
will be finalized towards the end of the year.
Historically, Oil India's net realization has been at premium to ONGC. However,
if flat discount of USD56/bbl is adopted in future, then the trend will reverse
and be positive for ONGC as its gross realization is higher than Oil India.
Targeting producing/discovered assets for acquisition
With net cash of INR109b, Oil India has earmarked INR60b for acquisitions.
Company is targeting to acquire small-medium sized producing/discovered
assets, as its current overseas portfolio is more skewed towards exploration
and is unlikely to add in production in next 3-5 years.
Management has clarified that they are not pursuing RGTIL (Reliance Gas
Transportation Infrastructure Ltd) stake acquisition.
Update on key blocks
(1) Carabobo - Onshore, Venezuela
JV partners in this block include Oil India, IOC (3.5% each), OVL, Repsol and
Petronas (11% each) with the rest 60% with national oil company, PDVSA.
Development drilling is expected to start in 2-3 months and company expects
the production to start by Dec-12 at 10kbpd and reach 400kbpd (gross) by 2016-
17. The block is expected to produce for a total of ~40 years. Project includes
construction of upgrader to transform the extra-heavy crude of 8-9º API into
medium crude 16-22º API.
OIL's planned investment in the project is about USD424m. and production
share will be 14kbpd of the planned plateau of 400kbpd.
(2) Key domestic blocks
Exploratory drilling is expected to start at a) MZ-ONN-2004/1 (Oil stake 85%) in Mizoram
and b) KG-ONN-2004/1 (Oil stake 90%) in KG basin, while data is being analyzed to
identify drilling locations in CY-OSN-2009/2 block (Oil stake 50%) in Gulf of Mannar.
Healthy oil/gas reserve ratio; RRR consistently > 1
OIL's reserve mix is favorable with oil contributing 64% of its 2P and 1P reserves
being only at 50% of 2P reserves, indicating a large scope for increase in 1P.
Further, its reserve replacement ratio (RRR) has consistently remained above one,
and the lower F&D cost of USD5.5/bbl proves its competence in current operating
Planned capex for FY13 is INR33.8b with a target to drill 40 exploratory (v/s 16 in
FY12) and 37 development wells (v/s 22 in FY12).
Valuation and view
We currently model Brent oil price of USD105/100/90/bbl in FY13/FY14 /long term,
and upstream sharing at 40% in both FY13 and FY14.
With under-recovery estimate of INR1.4t for FY13 and given the FY13 Govt. fiscal
deficit target at 5.1%, we believe price hikes are inevitable. We expect price hikes
for controlled products, viz, Diesel, Kerosene and LPG, to come any time soon.
We remain positive on Oil India due to its strong operational foothold: (1) steady
production growth, (2) high share of oil (55% in 1P and 62% in 2P) in its reserves,
and (3) attractive valuations, trades at >50% discount to its global peers on EV/
BOE (1P basis).
Key triggers: Subsidy rationalization in the long term, and in the near term, price
hikes in controlled products and value accretive cash deployment.
The stock trades at 8.5x FY13E EPS of INR57.2 and has an implied dividend yield of
~4%. Our TP ofINR565/share is based on average of three methodologies: (1) P/E
of 9x FY14E, (2) 4xFY14E EV/EBITDA and (3) DCF (WACC of 11.5%). Maintain Buy.