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Pricing strength, NRL to drive value

Oil India (OIL) reported EBITDA of Rs12.4bn (+4x/+3x YoY/QoQ), ahead of our estimate of Rs8.7bn, with production and opex ahead of estimates for the quarter. Net earnings were impacted, with higher impact of the NRL acquisition done for Rs86.7bn on both interest costs and other income. Resultantly, PAT of Rs5.1bn dipped 37% QoQ (Q1FY21 net loss of Rs1.8bn). Earnings were helped by USD37/bbl YoY increase in crude prices while O&G output of 1.46mtoe increased 2/7% YoY/QoQ, the first quarter of improvement in five quarters. The acquisition of controlling stake (~69.6%) in NRL, coupled with stronger crude prices and some improvement in production drives a significant revision in standalone EPS estimates (19/30% FY22/23E) and a >50% uptick in TP to Rs225. At CMP, the stock trades at 10x FY23E EPS / 8x EV/E. Upgrade to BUY.

O+G production – finally, some improvement after four quarters of weakness

Crude output/sales of 0.75/0.72mt (-1/-2% YoY) and gas output/sales of 0.72/0.6bcm (+4%/flat YoY) were ~5% ahead of estimates and total O&G production of 1.46mtoe was up 2/7% YoY/QoQ and 6% above estimates, the first quarter of overall YoY growth in five quarters. With the Baghjan asset fully primed for exploration post resolution of all firerelated issues, management is optimistic of production growth over the next 3-4 years.

NRL buy adds materially to SoTP value

The completion of acquisition of 54.16% stake from BPCL (as part of the divestment process) means OIL now owns ~80% of NRL (including 10.5% stake which will be bought back by the Assam Government). The 69.6% stake in NRL adds an estimated Rs19 to consolidated EPS and @5x EV/E adds a substantial Rs87/share to our SoTP value for OIL. NRL continues to benefit from the excise rebate of >USD15/bbl in GRMs, which is likely to continue, supporting group earnings. The acquisition has raised standalone debt to Rs140bn, but OIL has managed to repay Rs4bn of this already in Q2, and with plans to repay Rs7-8bn every quarter, leverage will not be a concern by FY23E.

Long-term production guidance to remain the key monitorable

Management remains very optimistic, with FY22E oil production target of 3.05mmt (vs 2.96mmt in FY21), while gas production is targeted at 3.2bcm (vs 2.6bcm in FY21). It has intensive drilling/development plans over the next 3-4 years, with the company targeting 7.2mtoe by FY24/25E vs 5.5mtoe in FY21, driven by development of new oil fields at Balimara/Kumchai, while Baghjan area is estimated to contribute incremental gas of ~5mmscmd (>4x from current levels) by FY24E.

Valuation and view – upgrade to BUY

OIL has completely mitigated the impact of the fire at Baghjan, with the loss of production from the same at ~1% of overall output in FY21. Even with conservative assumptions of small decline in annual oil output, the higher oil prices and marginally lower opex drive a material increase of 19/30% in FY22/23E EPS. At CMP, the stock trades at just 10x FY23E EPS and 8x EV/E. Upgrade to BUY.

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