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Baghjan field is back on its feet – stable outlook ahead

* OINL reported volume is in line with our estimate, while lower opex led to the EBITDA beat.

* The management said majority of the gas production is accruing from the Baghjan field currently as the fire-related issues are resolved. It is targeting ~5mmscmd of gas from this field (up from the current production of 1.6- 1.8mmscmd) over the next 3-5 years. It has started working on three more drilling wells, while one well was completed recently in the Baghjan field.

* Brent prices have started cooling off from its peak (of USD75/bbl in Jul’21 to ~USD70/bbl). We expect it to return to normal levels of USD60-65/bbl as OPEC+ gradually increase its oil production (by 0.4mnbopd per month starting Aug’21).

* We forecast a FY22E/FY23E Brent price of USD63/USD60 per bbl, considering the easing of the current 5.8mnbopd of production cuts. The stock trades at a 25% discount to its one-year forward long term P/E average of 8.4x. We maintain our Buy rating.

Lower opex led to the EBITDA beat

* OINL reported revenue was in line with our estimate at INR30b (+72% YoY).

This was on the back of in line volumes and realization (USD67.2/bbl):

* Oil sales stood at 0.72mmt (-2% YoY and +3% QoQ).

* Gas sales stood at 0.61bcm (+6% YoY and +10% QoQ).

* EBITDA came in higher than our estimate at INR12.3b (53% higher than our estimate), led by lower other expenditure. Higher interest cost and lower other income resulted in PAT of INR5.1b (v/s a loss of INR1.6b in 1Q and gain of INR9.2b in 4QFY21).

* Numaligarh Refinery (NRL): GRM improved to USD5.2/bbl in 1QFY22 from - USD3.15/bbl in 1QFY21. EBITDA stood at INR9.9b in 1QFY22.

Valuation and view

* The total capex plan for FY22 stands at INR50-55b, of which INR40-43b will be spent on OINL and INR10-12b on the NRL refinery.

* Increase in capex from INR220b to INR280b is under consideration for NRL. This will be used to make the unit petchem ready. Capex would be funded in the debt/equity ratio of 70:30. This equity proportion would be entirely funded by internal accruals of NRL only. The expected commissioning of the refinery expansion (from 3mmt to 9mmt) is FY24-25.

* Standalone debt stands ~INR140b (repayment guidance at INR12-15b in 1HFY22), with long term debt of ~INR115b and short term debt of ~INR25b.

* The management expects oil/gas production of ~7.2mntoe in FY24-25 (v/s 5.9mntoe/5.4mntoe in FY20/FY21). It is planning on arresting the decline from old fields through advanced recovery methods. In FY21, OINL acquired four blocks in OALP Round-V, increasing its acreage by 13%.

* The stock trades at 6.2x FY23E EPS of INR26.8. We use a SoTP-based fair value of 8x Sep’23E adjusted EPS of INR23.7 and add investments to arrive at our TP of INR200. We maintain our Buy rating.

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