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Oil India (OINL)
Energy
All well, at least for now. Oil India management is confident of steady growth in its
production volumes over the next few years. We also take comfort in our earnings
estimates based on 39% subsidy sharing for upstream companies given that the
2QFY12 burden has been provisionally restricted to a third of the subsidy losses. We
have updated our earnings model for OIL factoring in its FY2011 annual report. We
retain our BUY rating on the stock with a revised target price of `1,750.
Upstream companies to share 33.33% of subsidy losses for 2QFY12
We are pleasantly surprised that the subsidy burden on upstream companies has been provisionally
restricted to one-third of gross under-recoveries in 2QFY12 despite a sharp decline in overall
subsidy losses; the same has been confirmed by ONGC and OIL management. This is contrary to
the expectations of higher subsidy share being asked from upstream companies. However, we stay
cautious as the subsidy sharing scheme will likely be finalized by end-FY2012. Hence, we continue
to maintain our assumption of 39% subsidy burden on upstream companies for FY2012-13E.
Healthy reserve replacement ratio of 1.4X; high 2P reserves of 944 mn boe
We are encouraged by proved reserve accretion of 8.4 mn tons or 61.3 mn boe for OIL, which has
resulted in reserves replacement ratio (RRR) of 1.42X for FY2011 (see Exhibit 1). We highlight that
OIL has achieved a RRR of about 1.7X over the past six years which reflects (1) success of EOR/IOR
techniques implemented in its mature fields and (2) addition of new fields. OIL’s 2P reserves of 944
mn boe are higher by 87% versus its 1P reserves of 505 mn boe (see Exhibit 2). We believe high
2P reserves (>22 years of current production levels) should provide more comfort about long-term
volumes and medium-term volume growth.
Reiterate BUY given attractive valuations; stock discounting worst-case scenario
We maintain our BUY rating on the stock with a target price of `1,750 (`1,800 previously) based
on 9X FY2013E EPS plus the value of investments. We highlight that the stock is trading at
reasonably attractive valuations at 7.6X FY2012E EPS and 4.8X FY2012E DACF. The current stock
price is discounting a rather bleak scenario of net crude price realization closer to levels of FY2011
and 1QFY12. However, we see imminent improvement in net crude price realizations given (1)
retail price hikes of regulated products and (2) lower duties on diesel and crude oil from June 24,
2011 which would result in lower gross under-recoveries for the industry on an annualized basis
versus the run-rate of 1QFY12.
Revised earnings for FY2012-14E
We have revised our FY2012-14E EPS to `172 (-3.7%), `190 (-3.2%) and `194 (-3.4%) to reflect
(1) FY2011 annual report and (2) other minor changes. Key downside risk stems from higher-thanexpected
subsidy burden.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India (OINL)
Energy
All well, at least for now. Oil India management is confident of steady growth in its
production volumes over the next few years. We also take comfort in our earnings
estimates based on 39% subsidy sharing for upstream companies given that the
2QFY12 burden has been provisionally restricted to a third of the subsidy losses. We
have updated our earnings model for OIL factoring in its FY2011 annual report. We
retain our BUY rating on the stock with a revised target price of `1,750.
Upstream companies to share 33.33% of subsidy losses for 2QFY12
We are pleasantly surprised that the subsidy burden on upstream companies has been provisionally
restricted to one-third of gross under-recoveries in 2QFY12 despite a sharp decline in overall
subsidy losses; the same has been confirmed by ONGC and OIL management. This is contrary to
the expectations of higher subsidy share being asked from upstream companies. However, we stay
cautious as the subsidy sharing scheme will likely be finalized by end-FY2012. Hence, we continue
to maintain our assumption of 39% subsidy burden on upstream companies for FY2012-13E.
Healthy reserve replacement ratio of 1.4X; high 2P reserves of 944 mn boe
We are encouraged by proved reserve accretion of 8.4 mn tons or 61.3 mn boe for OIL, which has
resulted in reserves replacement ratio (RRR) of 1.42X for FY2011 (see Exhibit 1). We highlight that
OIL has achieved a RRR of about 1.7X over the past six years which reflects (1) success of EOR/IOR
techniques implemented in its mature fields and (2) addition of new fields. OIL’s 2P reserves of 944
mn boe are higher by 87% versus its 1P reserves of 505 mn boe (see Exhibit 2). We believe high
2P reserves (>22 years of current production levels) should provide more comfort about long-term
volumes and medium-term volume growth.
Reiterate BUY given attractive valuations; stock discounting worst-case scenario
We maintain our BUY rating on the stock with a target price of `1,750 (`1,800 previously) based
on 9X FY2013E EPS plus the value of investments. We highlight that the stock is trading at
reasonably attractive valuations at 7.6X FY2012E EPS and 4.8X FY2012E DACF. The current stock
price is discounting a rather bleak scenario of net crude price realization closer to levels of FY2011
and 1QFY12. However, we see imminent improvement in net crude price realizations given (1)
retail price hikes of regulated products and (2) lower duties on diesel and crude oil from June 24,
2011 which would result in lower gross under-recoveries for the industry on an annualized basis
versus the run-rate of 1QFY12.
Revised earnings for FY2012-14E
We have revised our FY2012-14E EPS to `172 (-3.7%), `190 (-3.2%) and `194 (-3.4%) to reflect
(1) FY2011 annual report and (2) other minor changes. Key downside risk stems from higher-thanexpected
subsidy burden.
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