Published on 22/10/2020 1:45:43 PM | Source: Emkay Global Financial Services Ltd

Hold Oil India Ltd For Target Rs.95 - Emkay Global

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Q1 misses estimates on higher expenses and dry well write-off

* Oil India reported standalone revenue/EBITDA/net loss of Rs17.4/1.97/2.49bn in Q1FY21. EBITDA was a 63% miss on higher-than-expected Other Expenses and dry well write-off of Rs1.15bn. It also booked Rs934mn as Baghjan blowout exceptional expense.

* Crude oil (incl. JV, condensate) production fell 8% yoy (down 1% qoq) at 0.75mmt, while gas fell 4% yoy (up 6% qoq) to 0.68bcm. LPG output was in line qoq at 8.4kt (down 10% yoy). Gas sales/production improved from 83% to 86% qoq vs. 90% to 87% last fiscal.

* Nominated Block crude realization fell 42% qoq to USD30.4/bbl, which was USD1.0/bbl discount to Brent vs. USD1.6 premium in Q4. Gas realization declined 24% qoq to USD2.5/mmbtu. Total revenue was in line, while crude/gas posted 7% miss/20% beat.

* We keep FY21/22/23E EPS unchanged and retain our TP of Rs95, valuing OIL’s core business at 4x EV/EBITDA. We maintain the Hold rating and UW stance in EAP. Stock rerating depends on gas pricing reforms, output recovery and spike in oil prices.


Result highlights: Oil India’s employee costs fell 3% yoy to Rs4.4bn (up 1% qoq), while Other Expenditure was higher than our estimate due to Rs1.8bn of provisions and high contract/service costs. DD&A fell 10% yoy to Rs3.6bn on lower depletion. Statutory levies were in line overall, though the crude royalty rate was high at 18.7%, offset by lower gas at 8.2% in Q1. Other income was up 6% yoy at Rs1.3bn. NB crude sales to production was down slightly qoq to 98%. NB gas sales volume rose 8% qoq to 0.56bcm (down 6% yoy). Transportation and renewable income jumped 36%/46% qoq (down 4%/6% yoy). EBIT for crude/gas/LPG/transportation was Rs733mn loss/Rs419mn/Rs105mn/Rs197mn loss. OIL reported consolidated PBT (before exceptional) loss of Rs2.2bn vs. Rs1.6bn of standalone loss while share of profits from associates/JVs rose 30% yoy (fell 22% qoq) to Rs3.7bn. There was no impact on going concern or carrying value of assets assessed due to Covid-19.


Management guidance: The dry wells write-off was on account of a well near Moran area in Upper Assam, while provisions were higher due to another well. Expenditure run-rate net off these one-offs is expected going ahead. Killing of the Baghjan blowout well is expected soon. While the well may not be salvaged, OIL’s existing operations in and plans for the field remain intact and it does not expect any statutory/judicial roadblocks and local issues. Crude production should remain range-bound, though gas is expected to grow. OIL retains capex guidance of Rs38-39/40-42bn for FY21/22, though there may be some shortfall. There is no new update on NRL buyout, which should possibly happen post BPCL EoI deadline and IP shortlisting. OIL has not heard about any official development on change in APM gas pricing formula. Dividend payout for FY21 may be in the range of 30-40% due to lower earnings.


Valuation: We value OIL on FY22E standalone EV/EBITDA and investments at a 50% holdco discount. Key risks are adverse oil-gas prices, policy issues, local tensions, cost overruns, ETF divestment, operational outages and dry holes. NRL acquisition is a key monitorable.


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