OIL INDIA

Macquarie initiates coverage on Oil India with `Outperform' rating. Oil India, the second-largest national oil company in India, enjoys multiple growth drivers and yet quotes at nearly half the value of its global peers. Oil India's superior reservoir management skills have enabled it to grow production 5.3% per year over the past two years compared with a 3.1% annual decline for ONGC. Oil India's exploratory success rate of 76% is amongst the best globally and compares with the world average of 20%. The current subsidy share mechanism to fund under-recoveries on sale of petroleum products is ad hoc. This results in unpredictable earnings and deters investors' interest in Indian PSU oil companies. OIL trades at an EV/reserves of $9/boe and an EV/production of $35k/boepd, which is at a 30-50% discount to its peer group. Looking at valuations differently, Oil India's current stock price reflects a market assumption of a long-term oil price of about $65/bbl. In the long run, oil prices are expected to oscillate around $75/bbl, which we believe is the level required for major new developments to yield acceptable returns.