 "OIL prepares to surf rising fuel tide")
Oil India’s stock got battered recently as it came close to its all-time low of Rs 407.6 (October 2009) when it touched an intra-day low of Rs 415 on August 29. This 28 per cent decline in just two months, on the back of a depreciating rupee and increasing crude oil prices, was more than justified. While the subsidy share is an overhang as always since the government has till now, in many years, not given a clear subsidy-share formula, the correction has turned the risk-reward favourable for investors. Further, among upstream companies, it is Oil and Natural Gas Corporation (ONGC) that shares more than 80 per cent of the upstream subsidy burden, which indicates that concerns with regard to Oil India are overdone.
Notably, the issues relating to the decline in production volumes in FY13 are also resolving and analysts now believe the worst is behind. The second half of FY14 should be better in terms of production and FY15 would see more upside. Vivek Gujarati at Anand Rathi feels that FY13 production of Oil India had been exceptionally affected. He says looking at the cash flows even at current production levels and considering the cash on books, the stock is trading cheap.
Apart from oil production, the gas output is also increasing and the expected doubling of prices should lead to an increase in profitability by Rs 1,000 crore (about 28 per cent of FY13 or earnings per share (EPS) gain of Rs 15 a share). Even if prices rise by 50 per cent (considering the objections raised by various quarters), the gains at the net level are significant as a $1/mmbtu rise in gas price will increase profit after tax (PAT) by about Rs 200 crore.
According to Bloomberg data, 40 of the 47 analysts polled have a buy rating on the stock, with a target price of Rs 598 (a 26 per cent upside potential from the current levels of Rs 475).
Oil India’s standalone crude oil production had declined 4.8 per cent to 3.7 million tonnes (mt) in FY13 compared to FY12, largely due to adverse law and order situation in Assam, which affected crude oil movement. The company has forecast for production of 3.95 mt in FY14, translating into an increase of about eight per cent. Some analysts though don’t see such a rise and expect production to go up gradually. Analysts at Antique Stock Broking observe that commissioning of the oil pipeline from Baghjan to Duliajan would help Oil India override local disruption affecting truck-based movements.
They estimate production of 3.7 mt and 3.9 mt in FY14 and FY15, respectively. However, analysts at Morgan Stanley say their estimates are similar to the company’s oil and gas production targets. Natural gas production target is set at 2,740 mmscm for FY14 (up four per cent year-on-year). The analysts observe that the crude oil targets for FY14 indicate the state government is helping it to ensure better security measures to avoid disruptions this year.
From a longer-term perspective, too, visibility is improving. In a 40:60 venture with ONGC Videsh (OVL), it is buying a 10 per cent stake in the prolific Mozambique fields. While production is expected to start by 2017, this field has 84 trillion cubic feet of in-place gas reserves, which should add to its annual production from 2018. Oil India is also planning acquisition of more assets globally, which will expand its existing global portfolio that includes minority stakes in hydrocarbon assets in Venezuela and Libya.
Attractive valuations
After the recent share-price fall, Oil India’s core business is trading at attractive valuations. Analysts at India Infoline, in their recent report, observe it has underperformed ONGC by 12 per cent over the past three months and, adjusted for the cash on the books, it trades at a 40 per cent discount to its larger peer on a core price-to-earnings ratio basis. Thus, they feel that at 7.2 times one-year forward PE, the stock more than adequately factors in subsidy-related uncertainties on its FY14 earnings and, hence, have a buy rating, with a target price of Rs 560.
Analysts at IIFL believe that on reserve valuations, too, it is cheaper. They add that, based on the 2P (proven plus probable) reserves, its stock trades at an enterprise value of $2.7 a barrel of oil equivalent as against ONGC’s $3.6. Higher value liquids (crude oil proportion) comprise 64 per cent of Oil India’s 2P reserves as against only 50 per cent for ONGC.
Importantly, most analysts have factored in crude oil gross realisation of $100 a barrel in FY14, while crude oil prices are around $110 currently. Hence, even if prices slip marginally, the downside is limited.
Notably, the issues relating to the decline in production volumes in FY13 are also resolving and analysts now believe the worst is behind. The second half of FY14 should be better in terms of production and FY15 would see more upside. Vivek Gujarati at Anand Rathi feels that FY13 production of Oil India had been exceptionally affected. He says looking at the cash flows even at current production levels and considering the cash on books, the stock is trading cheap.
Apart from oil production, the gas output is also increasing and the expected doubling of prices should lead to an increase in profitability by Rs 1,000 crore (about 28 per cent of FY13 or earnings per share (EPS) gain of Rs 15 a share). Even if prices rise by 50 per cent (considering the objections raised by various quarters), the gains at the net level are significant as a $1/mmbtu rise in gas price will increase profit after tax (PAT) by about Rs 200 crore.
According to Bloomberg data, 40 of the 47 analysts polled have a buy rating on the stock, with a target price of Rs 598 (a 26 per cent upside potential from the current levels of Rs 475).
Oil India’s standalone crude oil production had declined 4.8 per cent to 3.7 million tonnes (mt) in FY13 compared to FY12, largely due to adverse law and order situation in Assam, which affected crude oil movement. The company has forecast for production of 3.95 mt in FY14, translating into an increase of about eight per cent. Some analysts though don’t see such a rise and expect production to go up gradually. Analysts at Antique Stock Broking observe that commissioning of the oil pipeline from Baghjan to Duliajan would help Oil India override local disruption affecting truck-based movements.
They estimate production of 3.7 mt and 3.9 mt in FY14 and FY15, respectively. However, analysts at Morgan Stanley say their estimates are similar to the company’s oil and gas production targets. Natural gas production target is set at 2,740 mmscm for FY14 (up four per cent year-on-year). The analysts observe that the crude oil targets for FY14 indicate the state government is helping it to ensure better security measures to avoid disruptions this year.
From a longer-term perspective, too, visibility is improving. In a 40:60 venture with ONGC Videsh (OVL), it is buying a 10 per cent stake in the prolific Mozambique fields. While production is expected to start by 2017, this field has 84 trillion cubic feet of in-place gas reserves, which should add to its annual production from 2018. Oil India is also planning acquisition of more assets globally, which will expand its existing global portfolio that includes minority stakes in hydrocarbon assets in Venezuela and Libya.
After the recent share-price fall, Oil India’s core business is trading at attractive valuations. Analysts at India Infoline, in their recent report, observe it has underperformed ONGC by 12 per cent over the past three months and, adjusted for the cash on the books, it trades at a 40 per cent discount to its larger peer on a core price-to-earnings ratio basis. Thus, they feel that at 7.2 times one-year forward PE, the stock more than adequately factors in subsidy-related uncertainties on its FY14 earnings and, hence, have a buy rating, with a target price of Rs 560.
Analysts at IIFL believe that on reserve valuations, too, it is cheaper. They add that, based on the 2P (proven plus probable) reserves, its stock trades at an enterprise value of $2.7 a barrel of oil equivalent as against ONGC’s $3.6. Higher value liquids (crude oil proportion) comprise 64 per cent of Oil India’s 2P reserves as against only 50 per cent for ONGC.
Importantly, most analysts have factored in crude oil gross realisation of $100 a barrel in FY14, while crude oil prices are around $110 currently. Hence, even if prices slip marginally, the downside is limited.