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Analyst meet update; FY11 AR
At its recent analyst meet, Oil India management was confident of sustaining
strong output growth over the medium term helped by IOR/EOR at mature fields
and small discoveries. It generated Rs23bn FCF in FY11 and will stay FCF positive
over FY12-14 even as capex ramps-up. Its US$2.8bn cash-pile (40% of m-cap) can
also comfortably fund its inorganic growth target of accruing 20bpd of production.
We upgrade FY12-13 EPS by 1-4% to factor in higher crude production. BUY.
Rs23bn in FCF in FY11. Oil India’s FY11 AR indicates that it generated Rs23bn in FCF
adjusted for the Rs4.6bn extra subsidies payable in 4Q. It spent Rs16bn in capex on
seismic surveys (Rs3.1bn), exploratory drilling (Rs6.2bn), development drilling (Rs4bn)
and capital projects (Rs2.3bn) but we expect this to rise to Rs24-29bn annually over
FY12-14 as it increases focus on exploration and development. In addition, it will
spend US$425m over 2010-15 to fund its share of the Carabobo project in Venezuela.
US$2.8bn in net cash. Nonetheless, we expect it to continue to generate Rs27-32bn
in annual FCF over FY12-14 as higher revenues in crude (higher production,
realisations after retail price hikes), natural gas (higher production after the completion
of the Duliajan-Numaligarh pipeline in Mar-11) and transportation (revised pipeline
rates) offset the rise in capex and investments. We do not build in M&A but its
US$0.6bn annual FCF and US$2.8bn cash-pile should be adequate to fund its target of
accruing 20kbpd of production inorganically for which it has set aside ~US$1bn.
Upgrading EPS by 1-4%. Proved reserves fell 3%YoY in FY11 to 491mboe (12.3
years R/P) but we are encouraged by its 1.4x recoverable reserve replacement pointing
to upgrades over the long term; indeed its 2P reserves are 1.9x 1P. A strong resource
base bodes well for production growth; management highlighted that IOR/EOR at
mature fields and small discoveries has now driven crude rate to 3.9mtpa. We upgrade
our FY12-13 EPS by 1-4% to factor in higher crude production. All-in opex rose 6%YoY
to US$7.6/boe in FY11 but remains competitive. Finding (US$3.8/boe) and F&D cost
(US$5.5/boe) rose sharply (unsuccessful exploration) but remain under control.
Strong core return ratios. Overall Ebitda rose 10% in FY11 to Rs48bn. Reported
return on equity fell 3ppt YoY to 19.7%, though, due to the build up of cash which now
makes up 70% of its balance sheet. Stripped off this cash, CWIP, investments and preproducing
properties, however, we compute core-CROCI at over 100% in FY11.
Maintain BUY. We remain sceptical on any structural policy changes in retail fuel
pricing in India but continue to prefer upstream over downstream among the SOEs
given the relatively stable subsidy sharing and lower sensitivity to adverse changes
(1ppt = 0.6%). Indeed with the US$2.5bn ONGC FPO expected soon, newsflow in the
coming months (including subsidy share staying at one-third for FY12) may be
constructive. Fundamentally, we continue to prefer Oil India over ONGC because of its
stronger resource profile, production growth and higher net cash on its balance sheet.
Valuations at just 2.7x EV/Ebitda and US$4.8/2P-boe are also attractive. Maintain BUY
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Analyst meet update; FY11 AR
At its recent analyst meet, Oil India management was confident of sustaining
strong output growth over the medium term helped by IOR/EOR at mature fields
and small discoveries. It generated Rs23bn FCF in FY11 and will stay FCF positive
over FY12-14 even as capex ramps-up. Its US$2.8bn cash-pile (40% of m-cap) can
also comfortably fund its inorganic growth target of accruing 20bpd of production.
We upgrade FY12-13 EPS by 1-4% to factor in higher crude production. BUY.
Rs23bn in FCF in FY11. Oil India’s FY11 AR indicates that it generated Rs23bn in FCF
adjusted for the Rs4.6bn extra subsidies payable in 4Q. It spent Rs16bn in capex on
seismic surveys (Rs3.1bn), exploratory drilling (Rs6.2bn), development drilling (Rs4bn)
and capital projects (Rs2.3bn) but we expect this to rise to Rs24-29bn annually over
FY12-14 as it increases focus on exploration and development. In addition, it will
spend US$425m over 2010-15 to fund its share of the Carabobo project in Venezuela.
US$2.8bn in net cash. Nonetheless, we expect it to continue to generate Rs27-32bn
in annual FCF over FY12-14 as higher revenues in crude (higher production,
realisations after retail price hikes), natural gas (higher production after the completion
of the Duliajan-Numaligarh pipeline in Mar-11) and transportation (revised pipeline
rates) offset the rise in capex and investments. We do not build in M&A but its
US$0.6bn annual FCF and US$2.8bn cash-pile should be adequate to fund its target of
accruing 20kbpd of production inorganically for which it has set aside ~US$1bn.
Upgrading EPS by 1-4%. Proved reserves fell 3%YoY in FY11 to 491mboe (12.3
years R/P) but we are encouraged by its 1.4x recoverable reserve replacement pointing
to upgrades over the long term; indeed its 2P reserves are 1.9x 1P. A strong resource
base bodes well for production growth; management highlighted that IOR/EOR at
mature fields and small discoveries has now driven crude rate to 3.9mtpa. We upgrade
our FY12-13 EPS by 1-4% to factor in higher crude production. All-in opex rose 6%YoY
to US$7.6/boe in FY11 but remains competitive. Finding (US$3.8/boe) and F&D cost
(US$5.5/boe) rose sharply (unsuccessful exploration) but remain under control.
Strong core return ratios. Overall Ebitda rose 10% in FY11 to Rs48bn. Reported
return on equity fell 3ppt YoY to 19.7%, though, due to the build up of cash which now
makes up 70% of its balance sheet. Stripped off this cash, CWIP, investments and preproducing
properties, however, we compute core-CROCI at over 100% in FY11.
Maintain BUY. We remain sceptical on any structural policy changes in retail fuel
pricing in India but continue to prefer upstream over downstream among the SOEs
given the relatively stable subsidy sharing and lower sensitivity to adverse changes
(1ppt = 0.6%). Indeed with the US$2.5bn ONGC FPO expected soon, newsflow in the
coming months (including subsidy share staying at one-third for FY12) may be
constructive. Fundamentally, we continue to prefer Oil India over ONGC because of its
stronger resource profile, production growth and higher net cash on its balance sheet.
Valuations at just 2.7x EV/Ebitda and US$4.8/2P-boe are also attractive. Maintain BUY
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