| Sweet crude |
| Vishal Chhabria / Mumbai September 7, 2009, 0:43 IST |
Sound financials and healthy growth prospects coupled with inexpensive valuations make Oil India’s IPO an attractive proposition
Oil India, the country’s second largest oil and gas producer as measured by total proved and probable (2P) oil and gas reserves and production, is aiming to raise Rs 2,513-2,778 crore through a fresh issue of equity shares. These funds would be used to part finance projects worth Rs 4,560 crore that include exploration and appraisal activities, development activities in existing fields and purchase of capital equipment, over two years. While its business model is almost similar to that of ONGC, especially in terms of subsidy sharing and vulnerability to government’s policies, Oil India is relatively better placed than the country’s largest oil producer (ONGC) on a few counts. Notably, the offer is comparatively cheap as compared to ONGC as well as its other peers, and leaves room for investors to gain in the short as well as the long term.
Business model
Unlike ONGC, which has hydrocarbon producing assets spread across the country as well as overseas, Oil India’s current activities are centred around exploration, development, production and transportation of crude oil and natural gas from on-shore (land) assets in India. In fact, almost all of its crude oil 2P reserves and about 94 per cent of its natural gas reserves (unaudited independent reserves of about 975 million of oil equivalent, of which 575 million is crude oil) are located in the states of Assam and Arunachal Pradesh. In 2008-09, Oil India’s crude oil and gas production market share worked out to roughly 10 per cent and 7 per cent, respectively.
Over the last few years though, the company has expanded its horizon by bidding for blocks under the seven NELP auctions held so far, wherein it has cornered 24 blocks (excluding three blocks relinquished) spread over 12 states in India. As a measure to limit risk, the company has adopted a strategy of restricting itself to being an operator only in onshore blocks. This is in line with its immense (50 year) expertise of operating in difficult terrain of the North East. Of the 24 NELP blocks, it is an operator in 12 onshore blocks, while in the remaining 12 blocks (1 offshore, 7 deepwater and 4 onshore) the company is a non-operator holding relatively smaller stakes and wherein its consortium partners (mainly ONGC) have immense offshore expertise.
Beyond domestic borders, the company has also secured participatory interest, with its stake ranging 12-50 per cent, in 17 exploratory blocks (yet to be proven) in eight countries along with companies like Indian Oil, thus taking its total acreage to 161,000 sq km (of which 41,273 sq km is outside India).
Likewise, the company has also selectively diversified across the oil and gas value chain by taking minority stakes in downstream businesses like refining and marketing (26 per cent in 3 million tpa Numaligarh Refinery), a gas cracker project (10 per cent in Brahmaputra Cracker and Polymer) and a 23 per cent stake in Duliajan-Numaligarh Pipeline. The latter adds to its existing three pipeline assets, which include a 1,157 km crude oil pipeline (annual capacity of 44 million barrels), a 660 km NRL to Silguri product pipeline and a 10 per cent stake in 741 km pipeline based in Sudan. Lastly, it has also signed agreements with GAIL, Indian Oil and BPCL to explore opportunities in the city gas distribution business.
These moves are a part of its long-term strategy to grow, de-risk its business model as well as capture value through diversification into new oil and gas verticals at minimal risks, which provides comfort.
Going ahead, it intends to continue with its strategy of selective bidding for NELP blocks in India and at the same time acquire exploratory and producing assets abroad to further build on its reserves and output.
Robust reserve accretion
For any oil and gas exploration company, the amount of reserves it holds and its ability to consistently replenish these reserves provides a good indication of its future prospects. Oil India scores well on this count too given that it has consistently added to its reserve base enabling its reserve replacement ratio to stay at over 1.50 times in the last five years. In the last two years, it has added about 60 million barrels of oil and oil equivalent (BoE) to its 2P reserves from 13 new discoveries. And the reserves accretion is likely to continue in future as well believe analysts. “Despite operating in a mature oil province, Oil India’s in-place reserve base has risen 18 per cent in the last six years while it has also delivered a strong 1.7 times recoverable reserve replacement ratio over the last 12 years.
With current 1P (proved) reserves modelling only 25 per cent recovery (cf. 35-40 per cent globally) and 2P reserves almost twice the size of 1P, we see this trend continuing. Longer term, the heavy oil assets in Rajasthan (329 million BoE in-place) and exploration successes in India and overseas could be added upsides,” say CLSA’s analysts in a recent note.
Based on the company’s oil and gas production in 2008-09, its reserves can suffice for 23 and 28 years, respectively, which indicates that production levels should remain healthy going forward. Says Manish Sonthalia, senior VP Research & Strategy, Motilal Oswal Securities, “The company’s crude oil production is expected to grow by 4-5 per cent a year (from 25 million barrels in 2008-09) while gas production should double to over 4.5 billion cubic meters (bcm) by 2014.”
| HOW THEY STACK UP | ||||||
| Book Value (Rs) | RoNW (%) | EV/2P Reserve* | EV/ EBIDTA (x) | Price / BV (x) | PE (x) | |
| Oil India | 439 | 23.9 | 3.6/4.1 | 4.6/5.2 | 2.2/2.4 | 10.5/11.7 |
| ONGC | 365 | 25.3 | 5.4 | 6.4 | 3.2 | 15.4 |
| Cairn India | 168 | - | 12.8 | 286.0 | 1.5 | 61.7 |
| HOEC ** | 81 | 3.5 | 2.5 | 28.8 | 4.6 | 88.9 |
| Selan Exploration | 68 | 26.0 | 2.2 | 2.1 | 4.2 | 8.8 |
| * in $/barrel of oil equivalent ** 2P reserves are based on FY08 All figures based on FY09 financials Source: HDFC Securities | ||||||
Better efficiencies
Notably, the company’s operating efficiencies are better than that of ONGC as well as some of the global peers, believe analysts. And, although its concentrated production provides it added advantage, there are benefits on the operational side as well. “Oil India’s integrated oil and gas infrastructure, combined with its in-house expertise enables it to manage the costs and time efficiently. Consequently, its average finding costs and production costs benefit from the optimised manpower costs, low interest expense, relatively high use of in-house services in place of more expensive third-party contractors, adoption of cost-saving technology in exploration, development and production operations, and effective use of OIL’s large store of geological data and expertise,” says Sneha Venkatraman, analyst, HDFC Securities in a note. Additionally, Oil India uses enhanced oil recovery techniques from an early stage in the life of its oil fields to maximise recovery of oil and gas, which has helped it in sustaining poduction at its mature fields in the North East.
However, some of its cost advantage could get diluted as it explores new regions leading to relatively higher costs. Nevertheless, expect its expertise in the business to enable it in keeping costs under control and operating ratios attractive in future as well.
| HEALTHY TRACK RECORD | ||||
| 2006-07 | 2007-08 | 2008-09 | Q1 2009-10 | |
| Crude oil realisation ($/barrel) | ||||
| Gross realisation | 68.25 | 77.77 | 87.14 | 57.81 |
| Price post-subsidy | 48.55 | 54.96 | 60.01 | 55.97 |
| Net realisation | 29.55 | 38.47 | 41.22 | 39.45 |
| Production | ||||
| Crude oil (million barrels) | 22.17 | 22.38 | 24.95 | 6.34 |
| Natural gas (billion cubic metres) | 2.26 | 2.34 | 2.27 | 0.60 |
| Financials (in Rs crore) | ||||
| Revenues | 6,010 | 6,796 | 8,138 | 2,138 |
| EBIDTA | 2,585 | 2,845 | 3,562 | 1,110 |
| Net profit | 1,540 | 1,780 | 2,231 | 740 |
