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Another strong quarter

Oil India (OIL) has reported another quarter of robust earnings for Q1FY23 with EBITDA and PAT at Rs27bn and Rs15.6bn, up 117% and 206% YoY, respectively. EBITDA was in line with our estimate of Rs28bn, but PAT was substantially lower than our expectation of Rs22.8bn. PAT disappointed because of sharply lower other income of Rs623mn vs our forecast of Rs8bn. Overall production data was encouraging as well, with total oil + gas output rising 6% YoY to 1.55mtoe. Oil production at 0.8mt was up 4% and gas output at 0.8bcm was up 8% YoY. Consolidated result (including subsidiary NRL) was also strong with Q1 EBITDA/PAT of Rs49bn/Rs28bn, up 128%/166% YoY, respectively. We believe group earnings may have peaked out for the near term, with our FY23E-FY24E estimates factoring-in: 1) moderation in NRL GRMs, 2) moderation in Brent crude price to US$90-95/bbl vs >US$110/bbl currently, and 3) net realisations capped at US$75/bbl thanks to the new additional duties imposed by the government. Nevertheless, riskreward is compelling at current levels, given: 1) steady production growth, 2) upside risk to our target price, 3) strong GRM estimates, and 4) attractive valuations. Reiterate BUY with a revised target price of Rs328/sh.

* Volumes grow steadily YoY: Oil output at 0.78mt was up 4% YoY, a 10-quarter high and ahead of our estimate of 0.76mt. Gas output at 0.77bcm was up 8% YoY, also ahead of our estimate of 0.0.76bcm. QoQ growth in oil production was at 4% and gas production at 5%. Management has put in place ambitious plans to boost oil production to annualized levels of 4mt by FY25 (from FY22 levels of 3.05mt) and gas output to even higher levels of 5bcm (FY22: 3.05bcm). It aims to accomplish these targets by focusing on high-impact areas and OALP field development. We remain conservative in our base case estimates and factor-in 1% growth in oil production and 3-5% growth in gas production.

* Natural cap on oil realisations; gas prices and GRMs remain robust: Brent crude prices seem to have settled in the US$95-105/bbl range for the foreseeable future, against the backdrop of Russia-Ukraine conflict and tight supplies from Opec. However, due to the additional ‘windfall’ tax, net realisations seem capped at US$75/bbl for the next 12-18 months. Gas realisations and GRMs for NRL however remain above historical trends and will support resilient consolidated earnings for FY23E-FY24E.

* Reiterate BUY: We do factor-in a moderation in earnings from the record highs seen in FY22 with a sharply lower EPS estimate for FY24E vs FY22 (FY23E/FY24E EPS cut by 15%). However, we note this is still a robust 23% higher than the FY21 EPS and, even on these earnings, valuations of just 5.9x FY24E EPS and 4.6x EV/EBITDA are extremely attractive. We value OIL using the SoTP methodology, with DCF used for the upstream segment, EV/EBITDA for NRL earnings, EV/boe multiple for the holdings in Mozambique and Russia and investment in IOCL valued at 20% discount to CMP, delivering a target price of Rs328/sh.

* Key downside risks: 1) Sharp reversal in oil & gas price trends, 2) policy measures to cap gas realisations, 3) lower production, and 4) lower GRM performance from NRL.

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