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OIL India – going strong

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OIL India – going strong

Q2FY12 crude oil & natural gas production were record highs for the company.

Crude oil production rate has been increasing continuously and OIL is presently producing crude at a rate of 3.96 MMTPA (FY12 MoU target: 3.76 MMT). This is noteworthy as most of its production is coming from aging fields in the North East. There has been a steady growth in oil production since the last 3 years through induction of new technologies and accelerated exploration and drilling campaign. Q2 FY12 production rate is even higher than the FY13 MoU target of 3.91 MMT.

Gas production is set to increase at CAGR of 7.1% from FY11-13 driven by steady production from its NE & Rajasthan fields and monetization of contingent reserves. Gas supply to Numaligarh Refinery Ltd (NRL) would also be ramped up to 1 mmscmd. Revision in APM & non-APM gas prices after FY14 is expected to provide another jump to gas sales going forward.

We assume 39% of the gross subsidy burden to be borne by the upstream sector in perpetuity. Taking into account the fact that the upstream sector has shared 33% of the subsidy burden in H1 FY12, we expect the upstream sector to share 51% of the total under recoveries for H2 FY12. However, we expect OIL to post FY12 net realization of $ 67/bbl.

Oil India will also be holding a Board Meeting on Dec 20, 2011 to consider the declaration of Interim Dividend for FY12. As the company is holding a cash balance of Rs 136 bn as of Sept 2011 which translates into a whopping Rs 565/share, we expect a big dividend which will act as a trigger for the stock price.

We maintain our BUY rating with a target price of Rs 1,526.

Written by Fundamental Side

December 16, 2011 at 12:41 pm

Why has the oil & gas sector underperformed?

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Crude oil prices, refining margins and petrochemical spreads have been rising throughout CY2010-11. In spite of this, the oil & gas sector has underperformed the broader index with the BSE Oil Index dropping by 2.7% as against a gain of 11.3% in the BSE 100 Index year-to-date.

The reasons for the above are not hard to find. Lack of clarity regarding the subsidy sharing mechanism hangs like an albatross around the necks of the upstream companies (ONGC, OIL India) as well as the refining & marketing companies (IOCL, BPCL, HPCL). The positive effect of petrol deregulation has been nullified by the relentless rise in crude prices (Brent crude touched $ 99/bbl couple of weeks ago). This has increased the projected under recovery for FY11 to Rs 73,000 cr, compared to the projection of Rs 53,000 cr made post petrol deregulation in Jun 2010. Hopes of diesel deregulation in FY11 have been nipped in the bud by the Government in the face of 8% plus inflation levels. The Government, which is expected to provide for half of the total under recoveries, will find it tough to rein in fiscal deficit as it has abolished the practice of issuing oil bonds.

Cairn India, whose stock price has a correlation of 95% with crude price, has not performed in line with crude prices, as it awaits Government approval of its take-over by Vedanta Plc. RIL has turned in a stellar Q3 performance on the refining & petrochemicals front, however, ramp up of gas output from the prolific KG D6 basin remains uncertain. This delay is also raising questions on optimum capacity utilization of the pipeline network that is being set up by GAIL (India) and GSPL in the near term. Petronet LNG will be the beneficiary of the developing gas shortage scenario in the country.

As a response to India’s over dependence on crude imports, the Government is considering a system of OALP (Open Acreage Licensing Policy) where oil firms can choose the blocks they want to explore without waiting for the Government to put them on offer. This will minimize the lead time between bidding & commencement of exploratory activities, which can be as long as 3 yrs. The Government also needs to apply its mind towards simplifying the maze of price controls, duties and taxes being charged on the regulated petroleum products so that investors gain clarity on the working of the oil & gas sector.

Written by Fundamental Side

January 24, 2011 at 3:02 pm