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Gains from oil & gas rise; some headwinds too

Oil India’s (OIL) Q2FY22 recurring standalone EPS was up 35% YoY driven mainly by rise in oil price realisation; Q2 EPS would have been up 143% YoY if exploration cost was flat YoY. Q2 consolidated recurring EPS was up 12% YoY with share of profit of subsidiary NRL and associates up 19% YoY. Upside to FY22E EPS from Brent at latest futures being at US$77/bbl vs our estimate of US$70/bbl and boost to NRL’s GRM from the recent jump would be neutralised by downside likely from exploration write-off surge in Q2 and hit to NRL’s GRM of ~US$8/bbl on cut in excise on auto fuels on 4-Nov. FY23E APM gas price may be 27% and Brent 17% higher than our estimate based on latest futures, implying 25% upside to FY23E EPS. We cut our target price by 7% to Rs238 (10% upside) as we raise exploration cost estimate. We upgrade OIL to ADD from HOLD.

* Q2 EPS up 35% YoY on oil price rise: OIL’s Q2FY22 standalone recurring EPS was up 35% YoY driven by 66% YoY rise in oil price realisation, 2% YoY rise in oil sales volume and 3.3x YoY surge in other income. Consolidated EBIT was up 27% YoY driven by 66-20% YoY rise in oil and refinery products’ (NRL) EBIT. Gas EBIT loss widened to Rs3.4bn vs Rs1.02bn in Q2FY21, hit by 25% YoY fall in gas price. Q2 consolidated recurring EPS was up 12% YoY with share of profit of subsidiary NRL and associates up 19% YoY.

* Upside from higher oil price and GRM nullified by higher exploration write off and excise cut: FY22E Brent works out to US$77/bbl based on latest futures for rest of the year vs our FY22 estimate of US$70/bbl. Reuters’ Singapore GRM has surged to US$7.5/bbl in Q3FY22-TD vs US$2.9/bbl in H1 implying gains for NRL. However, these gains are likely to be neutralised by cut in excise duty on auto fuels that would hit its GRM from Nov’21 by US$8/bbl and upside to other expenditure as it was Rs14.8bn in H1 boosted by exploration cost write off vs Rs20bn in FY22E.

* NBP and HH strength may mean 27% upside for OIL’s FY23E APM gas price: Based on latest UK NBP and HH futures, we estimate OIL’s FY23E APM gas price at US$8.24/mmbtu to be 27% higher than our estimate of US$6.5/mmbtu.

* Cut target price on exploration cost hike: As per the management, exploration is over in KG and Mizoram blocks in which large write-offs occurred. Large write offs are likely when exploration starts in OALP acreage in 12-18 months. We have cut DCF-based target price by 7% to Rs238 on raising exploration cost estimate.

* 6-25% upside to FV & FY23E EPS: Upsides to FY22E EPS would be nullified by downsides unless exploration write-off surges even in H2; we keep our FY22E EPS unchanged as the management suggested it is unlikely. Based on latest futures, Brent is 17% and APM gas price 27% higher than base case, which would imply 25% upside to FY23E EPS and 6% upside to FV to Rs251/share.

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