Oil India -- Dual kicker - Price and volume gains :: Macquarie Research,

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Oil India
Dual kicker - Price and volume gains
Event
 Oil India (OIL) reported a YoY doubling in profits (up 51% QoQ) to Rs 8.5bn
on account of strong ramp-up in crude and gas production to normal levels
post the drop last year due to the Numaligarh refinery shutting down for 100
days, and higher crude realizations. Higher other income was the icing on the
cake. We reiterate OP, with a TP of Rs 1,687 (from Rs 1,684 earlier).
Impact
 Standalone crude production grew 20% YoY and 2% QoQ: The
Numaligarh refinery’s major shutdown in 1QFY11 is the reason behind the
YoY jump, as production has ramped post the resumption. Notably, OIL’s
volumes have grown by 8% more than the normalised levels.
 Gas production grew 16% YoY and 7% QoQ on the back of gas supply to
Numaigarh resuming, as well as increased offtake by industrial consumers.
 Gas realisation doubles… The government doubled OIL’s gas price
realisation to US$ 4.2/mmbtu from June 1, 2010, i.e. to similar levels as RIL.
Scope for further hikes is significant as imported LNG at ~US$ 12/mmbtu fills
in a very large domestic gas deficit.
 Subsidy rose to Rs17.8bn yet net realizations up 13% QoQ (US$60/bbl):
Oil India’s subsidy burden rose to Rs17.8 bn (share in upstream increased to
12.3% from the usual 10-11%), but net crude realizations still rose to
US$60/bbl (from US$53/bbl Q4FY11) due to higher production and Brent oil
prices increasing 12% QoQ to average US$ 118/bbl. Recent sharp increase in
petro-product prices should curtail this burden further in coming quarters.
 Higher other income and QoQ-lowered write-offs boosted bottomline:
Other income rose to Rs 3bn due to the rise in interest income from bank
deposits (up 20% QoQ and 27% YoY). Dry well write-offs and provisions
declined 31% QoQ, further boosting profits.
Earnings and target price revision
 Our FY12-14E PAT raised by 1-4% on mildly increased volume assumptions,
and higher other income estimates. TP increased marginally to Rs1687.
Price catalyst
 12-month price target: Rs1,687.00 based on a Sum of Parts methodology.
 Catalyst: Petroleum product and gas price hikes, new oil discoveries.
Action and recommendation
 Lowest cost producer: Despite increases, at US$5.5/bbl Oil India has one of
the lowest Finding and Development costs globally, which is a key advantage
over its regional peers. The stock is trading at an EV/1P reserves multiple of
US$9.8/bbl vs a global average of ~US$18/bbl.