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Macros favorable; gas production grows – maintain Buy

* Oil India (OINL) reported lower-than-estimated EBITDA on higher other expenditure, despite the beat on gas volumes (+6% est.; +22% YoY, +1% QoQ).

* The management remains confident that gas production would further increase hereafter, led by the various production efforts underway. It has started working on three more drilling wells, while one well was completed recently in the Baghjan field (with the target to achieve ~5mmscmd of gas from this field over the next 3–5 years).

* Brent prices continue to record an uptick (and have reached USD83/bbl in Nov’21 from an average of USD73/bbl in 2QFY22) owing to the gas to oil switch creating additional demand of 0.5mnbopd.

* Continued lower supply from OPEC+ (production cuts still at ~4mnbopd), along with supply disruptions in Angola and Nigeria – against high demand on the back of robust global growth – resulted in inventory draws and high oil prices.

* As highlighted in our report, Warming up to the winter ahead… Oil price rally may strengthen, although temporarily, we maintain our stance on the normalization of Brent prices by end-FY22 and build in Brent price assumptions of USD69/65/60/bbl for FY22E/FY23E/FY24E.

* The expectation of a severe winter, coupled with supply constraints and lower inventory, has led to gas prices at international hubs trading at multiyear highs. Considering the same, we build in gas price assumptions of USD2.6/5/4/mmbtu for FY22/FY23/FY24E. The stock trades at an 18% discount to its one-year forward long-term PE average of 8.3x. We maintain a Buy rating

Lower-than-estimated EBITDA on higher other expenditure

* Revenue was in line with estimates at INR33.1b (+53% YoY, +10% QoQ), with realization at USD71.4/bbl.

* Oil sales were in line at 0.74mmt (+2% YoY and QoQ).

* Gas sales came in at 0.67mmt (+6% est; +22% YoY, +11% QoQ).

* EBITDA came in at INR9.1b (-35% est) on the back of higher other expenditure. PAT stood at INR5.0b (+111% YoY, flat QoQ).

* 1HFY22 revenue was up 61% YoY to INR63.2b, in line with better realization at USD69/bbl (v/s USD37 in 1HFY21). EBITDA increased 130% YoY to INR21.5b, with adj. PAT coming in at INR10b (v/s INR2.2b in 1HFY21).

* The company declared interim dividend of INR3.5/share.

Valuation and view – maintain Buy

* The total capex plan for FY22 stands at INR50–55b, of which INR40–43b would be spent on Oil India and INR10–12b on the NRL refinery.

* The NRL capex of INR280b would be used to make the unit petchem-ready. The capex would be funded via 70:30 debt to equity; this equity proportion would be funded entirely by the internal accruals at NRL. The completion of the refinery expansion (from 3mmt to 9mmt) is expected over FY24–25.

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