Oil India

 

 

Oil India's heavy capex plan, gas deregulation and expanding portfolio of E&P blocks make the stock an attractive bet for long-term investors

 

   ALTHOUGH Oil India's results for the June 2010 quarter will appear subdued, long term investors betting on India's oil sector should buy into the stock on dips. The company is set to double its gross block in the next couple of years and to invest in several projects also.

BUSINESS:

Oil India is the country's third-largest oil producer at 70,000 barrels per day and 6.6 million cubic meters per day of natural gas. Oil India, in which the government holds a 78.4% stake, recently achieved a 'Navratna PSU' status.
   The company holds stakes in 65 domestic oil blocks and 9 overseas blocks. It has historically operated out of north eastern states of India and its production predominantly comes from onshore blocks. The company's proven reserves (1P) are estimated at 521 million barrels of oil equivalent or 12 years of current production level. The proven and probable (2P) reserves are estimated to last over 22 years at the current level of production.

   The company also owns and operates 1,157 km-long crude oil pipeline with an annual capacity to transport 6 million tonne that transports its crude oil to refineries. Similarly, it also operates 660 km 1.72 mtpa pipeline for petroleum products. Besides, it holds minority stakes in two other pipelines — 741 km pipeline in Sudan and 192 km Duliajan-Numaligarh pipeline. The company also holds a 26% stake in Numaligarh Refinery. Being an upstream oil producer, the company had been forced to share a part of the underrecoveries of the downstream oil marketing companies. In the past 6 years, the company has shared over Rs 10,500 crore, or 9%, of the total under-recoveries borne by the upstream companies.

GROWTH DRIVERS:

The recent deregulation of administered gas prices has immensely benefited the company, which has indicated a net benefit to the tune of Rs 350 crore on an annualised basis. This will immediately improve the company's net profit for FY10 by more than 13%.

   Despite being in production for more than a century, the Assam Arakan basin is relatively underexplored with DGH estimating discovered hydrocarbons so far at around 27% of the total prognosticated resources. Induction of world-class technology to increase reserves and production from existing acreages is one of the key strategies adopted by the company.

   For the next two years, the company has lined up an ambitious capex programme to invest nearly Rs 8,500 crore, which will more than double its gross block. While nearly 60% of the capex will be incurred on exploration and development activities, more than one-fourth of the kitty will be spent on merger and acquisition activities. The management has indicated their preference to go for small and medium-sized companies in E&P space producing around 10,000-20,000 bpd.

   The company is also investing in creating evacuation and storage infrastructure that can support higher natural gas production. Its pipeline to carry natural gas to Numaligarh refinery is set to complete by July-end. The gas-based Brahmaputra Cracker and Polymers project is expected to come up by 2012 that will almost double Oil India's current gas output. It has also tied up with other oil companies to lay city gas distribution projects. The company has picked up a 3.5% stake in Venezuela's Carabobo project, which will translate in 14,000 bpd production once the project reaches its plateau at 400,000 bpd over the next few years.

FINANCIALS:

The company's net sales have grown at a cumulative annualised growth rate of 16.7% during the past 10 years, while the net profit grew at 21.1%. The company has always been a cash-rich and debtfree. The Rs 2,800-crore IPO in August 2009 has given an additional booster to its cash on books, which has increased at a CAGR of 47.7% in the past 10 years to Rs 8,542.9 crore as on March 31, 2010.

   The company has increased its oil production in the past 5 years at a CAGR of 2.8% and natural gas at 3.7%. Its reserves replacement ratio — addition to hydrocarbon reserves compared to its depletion due to production — has always remained above 1 in the past five years.

   The company's performance for the June 2010 quarter will be subdued against the previous year due to the extended shutdown of its largest customer, Numaligarh refinery, in April and May 2010. This resulted into a loss of sales to the tune of 1 million barrels of oil and 28 mmscm of natural gas.

VALUATION:

Based on the profits for FY10, the company's shares are currently trading at a price-to-earnings multiple (P/E) of 12.8 and the dividend yield works out to be 2.4%. Its immediate competitor ONGC is trading at a P/E of 14.3 with a dividend yield of 2.5%. Considering the scaling up opportunities available to it going forward, the company is likely to outperform in the longer run.