Oil India - "Highest ever quarterly production" ::LKP

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Key highlights

Ø  OIL India set a new high in both crude oil (0.957 MMT) & natural gas production (0.641 bcm) in this quarter and consequently, surpassed our expectations.

Ø  Total sales for the quarter stood at Rs 23,660.8 mn, 7.7% above our estimate of Rs 21,961.6 mn.

Ø  Crude sales for the quarter stood at Rs 19,560 mn, which is up 13.7% q-o-q & 46.9% y-o-y.  Crude sales qty. of 0.963 MMT was up 0.013 MMT q-o-q & 0.184 MMT y-o-y.

Ø  Gas sales for the quarter stood at Rs 2,644.2 mn, which is up 10% q-o-q & 78.7% y-o-y. Gas sales qty. of 0.508 bcm was up 0.043 bcm q-o-q & 0.085 bcm y-o-y.

Ø  Not only have production nos. improved but realizations have also improved in spite of a steep increase in the subsidy burden.

Ø  Q1 FY12 subsidy burden of Rs 17,806.5 mn ($56.8/bbl) was higher compared to subsidy/bbl of $51.1/bbl in Q4 FY11 & $28.4/bbl in Q1 FY11.

Ø  Gross realization for Q1 FY12 was $116.3/bbl owing to the prevailing high crude prices. Hence, Q1 FY12 net realization of $59.6/bbl was higher compared to $52.9/bbl in Q4 FY11 & $49.7/bbl in Q1 FY11.

Ø  The hike in APM gas price to $4.2/mmBtu in Jun 2010 has led to 51.8% y-o-y jump in blended natural gas realization.

Ø  The combination of higher production figures and better operational performance resulted in a net profit of Rs 8,496.1 mn, which was 14.5% ahead of our estimate. EPS for the quarter was Rs 35.3.

Outlook and Valuation

The upstream sector’s share of the gross under recoveries, which was fixed at ~33% during FY08-10, has been increased suddenly to ~39% in FY11. Since our FY12 & FY13 estimates of gross under-recovery at Rs 792 bn & Rs 722.3 bn are higher than gross under recovery of ~Rs 782 bn in FY11, we don’t foresee a return to the 33% sharing mechanism in the near term. Accordingly, we assume 39% of the subsidy burden to be borne by the upstream sector in perpetuity. We estimate post-subsidy realization for OIL India to be $69.2/bbl and $67.8/bbl respectively in FY12 & FY13. As per our estimates, OIL India’s crude realizations are capped at ~ $70/bbl going forward.

We maintain our BUY rating with a target price of Rs 1,512. Our price target translates into EV/boe of $ 6.1/boe and FY12E & FY13E P/E of 11.5x and 11.2x respectively.