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Macros favorable; rise in crude oil prices to benefit

* Oil India (OINL) reported EBITDA lower than estimated owing to higher contract charges. Oil sales were in-line at 0.73mmt, with gas sales below estimates at 0.63bcm for 3QFY22. Other income was higher due to dividend income from IOCL (INR2.4b), OIPL International (INR2.7b), and NRL (INR2.7b).

* The management expects APM prices to be in the range of USD5.5– 5.75/mmBtu in Apr’22 and USD6–6.5/mmBtu in Oct’22. No subsidy sharing on account of possible under-recoveries on LPG is expected, as per the company.

* Although OPEC+ is yet to roll back the 3.4mbopd production cuts initiated in Apr’20, fast recovery in oil demand, the switch from high-priced gas to oil, and low inventories resulted in Brent reaching seven-year highs of USD94/bbl.

* Commercial inventories of US oils and liquids declined to 1.18bnbbl in Dec’21 (from 1.34bnbbl in Dec’20). Commercial oil and liquid inventories in OECD also declined to 2.7bnbbl in Dec’21 (from 3bnbbl in Dec’20). The fall has been led by a sharp rise in oil demand, delays in the ramp up of newly discovered fields, and lack of adequate supply from OPEC+. Recent geopolitical risks have also fuelled oil prices.

* We build in gas price assumptions of USD2/mmBtu / USD6.6/mmBtu / USD4/mmBtu for FY22E/FY23E/FY24E. The stock trades at a 28% discount to its one-year forward long-term PE average of 8.1x. We use an SOTP-based fair value of 8x FY24E adj. EPS of INR27 and add investments to arrive at Target Price of INR305. Maintain Buy.

Oil sales in-line; gas sales continue to decline 

* Revenue was in line with our estimate at INR37.4b (+76% YoY, +13% QoQ), with realization at USD78.6/bbl. 

* Oil sales stood in line at 0.73mmt (flat YoY, -2% QoQ). Gas sales came in at 0.63bcm (6% lower than our estimate; up 8% YoY, but down 6% QoQ).

* EBITDA came in at INR12.7b (19% below our estimate). PAT stood at INR12.4b (25% higher than our estimate; up 38% YoY and 147% QoQ).

* The company declared a second interim dividend of INR5.75/share (in addition to INR3.5 declared earlier).

* The Government of Assam paid INR4b for the remaining 2.52% equity shares of NRL. The company tested the carrying value of the investment in Oil India (USA) for impairment and reversed the impairment loss by INR1b.

* Revenue rose 66% YoY to INR100.5b, in line with better realization at USD72.4/bbl in 9MFY22 (v/s USD39.1 in 9MFY21). EBITDA grew 306% YoY to INR34.1b, with adjusted PAT at INR22.6b (v/s INR8.9b in 9MFY21).

* Oil sales were flat YoY at 2.2mmt, with gas sales at 1.9bcm (up 12% YoY, primarily due to the ramp-up at the Baghjan field after the blowout).

Valuation and view – maintain Buy 

* The total capex plan for FY23E stands at INR43b, with no equity investments to be made in Numaligarh Refinery Ltd (NRL) in FY23.

* The NRL expansion would be completed by FY24–25E, with capex of INR280b, of which INR9b was spent last year and INR36b is being planned for FY22E and INR10b for FY23E. The viability gap funding would be only INR10b. The capex would be funded via 70:30 debt: equity; and this equity proportion would be entirely funded by internal accruals of NRL only. The commissioning of the refinery expansion (from 3mmt to 9mmt) is expected by FY24–25.

* The company expects crude oil production of 3.6mmt in FY23 and 4mmt by endFY24, with FY22 production expected to be at 3mmt. This incremental production would come from existing production fields. The gas production guidance stands at 4bcm for FY24E, largely from Baghjan; the current increase in production is also from this field.

* The stock trades at 7.3x FY24E EPS. We use an SOTP-based fair value of 8x FY24E adj. EPS of INR27 and add investments to arrive at Target Price of INR305. Maintain Buy.

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