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Spark Capital: OIL India: In-line results; Volume growth and fuel price hike to trigger momentum




Spark Capital Advisors(India) Private Limited


14 Feb 2013





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In-line results; Volume growth and fuel price hike to trigger momentum Oil India (OIL) reported in-line results with EBITDA of Rs. 12.3bn declining by 16% yoy (3% qoq) due to lower volumes and higher subsidy (flat qoq). Production volumes declined 3% yoy and qoq, due to blockades impacting production from certain regions in Assam. OIL is confident of resolving the issues by end of FY13E and guides a 4% volume growth in FY14E. Subsidy burden of ~Rs. 19.5bn was based on $56/bbl of sales volumes in line with previous quarter. Higher differentials to brent ($2/bbl in 3q vs $1/bbl in 2q) offset the lower qoq under recovery resulting in flat net realisation. Nevertheless, lower exploratory write offs restricted the fall in earnings to 7% yoy (1% qoq). Despite the recent rally on announcement of monthly Diesel price hikes, OIL trades at ~6x FY14E core earnings vs ~8x for ONGC – undemanding in our view. Successful implementation of diesel hikes (atleast 8-10 months), uptick in production, APM gas price hike, and deployment of cash (~$2.6bn- 45% of Mcap) would drove momentum in the stock price. We slightly reduce our FY14E volume estimates and reduce our TP to Rs. 684 (Rs. 712). Maintain Buy Upstream share: Upstream subsidy share continued to be determined based on $56/bbl. It was Rs. 151bn on the gross under recovery of ~Rs. 393bn for 3QFY13, flat qoq. We expect FY13 gross oil under recovery of Rs. 1.6tn and upstream share of ~Rs. 600bn based on GAIL plus $56 per bbl of ONGC-OIL sales volumes. OIL and ONGC have asked MoPNG to remove condensate from subsidy calculations, if finalised ONGC would stand to benefit more than OIL Volume growth: OIL’s 3Q production was lower (3% qoq) due to blockades. OIL expect these issues to be resolved by Mar’13 end and guided for 4% yoy production growth in FY14E to 6.69MMT (Oil – 3.95MMT and gas – 2.74BCM). BCPL is likely to be commissioned by Dec’13/Jan’14. OIL expects peak gas offtake of 1.35mmscmd by this petchem unit. We expect a volume growth of 3%/9% in FY14E/15E (CAGR 6% growth- FY13E-15E) Exploratory update: OIL is stepping up exploration in Mizoram and KG onshore blocks. In KG block, order for rigs have already been placed and expect first well to be spudded in Apr’13. For Mizoram block rig orders are likely to be placed soon. OIL’s first exploratory well in Gabon was abandoned but it is drilling two more wells in this month. Cash utilisation: OIL expects to invest ~$420mn in Carabobo over the next 3-4 years. It has already signed non binding agreements with a few players for potential acquisitions. We believe sealing of a large deals over next 6 months would allay concerns on cash (~$2.6bn) utilisation and provide new pockets of growth

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