IGI Logo

Another powerful quarter…

Oil India (OIL) reported another quarter of robust earnings. Q2FY23 EBITDA and PAT at Rs20bn and Rs17.2bn, were up 90% and 3.4x YoY respectively, even as QoQ performance was hampered due to levy of US$24/bbl windfall tax on Q2 oil realisations. Nevertheless, the results were well above I-Sec’s estimated EBITDA of Rs17.4bn and PAT of Rs10.3bn. Overall production data too was encouraging, with total oil + gas output rising 3% YoY (4% QoQ) to ~1.6mtoe. Oil production at 0.8mt was up 4% and gas output increased 2% YoY to 0.8bcm. Consolidated result (including subsidiary NRL) was also strong with Q2 EBITDA/PAT of Rs27bn/Rs21bn, up 17%/84% YoY, respectively. We believe group earnings may have peaked out for the near term. Our FY23E-FY24E estimates factor-in: 1) moderation in NRL’s GRMs, 2) H2FY23E oil realisations likely to be capped at US$75/bbl vs ~U$$94/bbl in H1, and 3) higher capex impacting depreciation and interest costs for the group (on account of NRL expansion). Nevertheless, riskreward is compelling at current levels, given steady production growth, attractive valuations, and upside risk to our stock price estimates. Reiterate BUY with a revised target price of Rs267/sh (earlier: Rs335/sh).

* Volumes grow steadily YoY: Oil output at 0.79mt was up 4% YoY, a 11-quarter high and ahead of our estimate of 0.77mt. Gas output at 0.82bcm was up 2% YoY, also ahead of our estimate of 0.78bcm. QoQ growth in oil production was at 2% and gas production at 7%. Management has put in place ambitious plans to boost oil production to annualised levels of 4mt by FY25 (from ~3.05mt in FY22) and gas output to even higher levels of 5bcm (FY22: 3.05bcm). Company 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 2% growth in oil production and 3-5% growth in gas production.

* Windfall tax caps 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. Nevertheless, gas realisations and GRMs for NRL remain above historical trends and will support resilient consolidated earnings for FY23E-FY24E.

* Reiterate BUY: We increase our earnings estimates for FY23E/FY24E EPS by 17%/20% respectively owing to marginally higher realisation on oil and above-average GRMs for NRL. However, the cut in target price is due to NRL’s higher net debt on account of higher capex. Even on these earnings, valuations work out to just 4.6x FY24E EPS and 5.0x EV/EBITDA, which we think are extremely attractive. We value OIL using the SoTP methodology, with DCF used for the upstream segment, EV/EBITDA for NRL earnings, EV/boe for the holdings in Mozambique and Russia, and investment in IOCL valued at 20% discount to CMP – delivering a target price of Rs267/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.

To Read Complete Report & Disclaimer Click Here

or More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7 SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer