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Earnings aided by higher crude

Our view

OINL’s 2QFY22 operating profit at Rs 9.1bn (+24% YoY; -26% QoQ) stood below our (by 32%) and street ( by 35%) estimates on account of higher than estimated provisioning/expensing of dry well and exploration write offs. In addition, the earnings during the quarter was largely aided by 67% YoY & 6% QoQ higher crude oil prices, even as crude production was largely flat YoY. In our view the strength in crude oil prices is on account of a temporary mismatch in demand and supply and should moderate as supply situation eases. In that backdrop with crude production on a natural decline and barely supported by IoR/EoR, we see a possibility of earnings moderating going ahead. Downgrade to SELL, with a Mar’23 TP of Rs 185/sh.

Result Highlights

* 2QFY22 Profitability: Operating Profit and PAT stood at Rs 9.1bn (+24% YoY; - 26% QoQ) and Rs 5.0bn (+111% YoY; -1% QoQ). A recovery in crude oil realization to an average of USD 71.4/bbl (1Q: USD 67.2/bbl), along with higher other income of Rs 3.7bn, backed by high dividend payout from IOCL, Numaligarh and Foreign subsidiary aided 2QFY22 earnings

* 1HFY22 Profitability: The 1HFY22 Ebitda & PAT stood at Rs 21.6bn (+130% YoY) and Rs 10.1bn (vs loss of Rs 97mn in 1HFY21), respectively. The YoY growth in earnings flowed from 14% YoY higher gas sales, and also due to absence of exceptional cost related to Baghjan blowout, which was part of base 1H.

* Crude Oil Production: The crude oil production for the 2QFY22 and 1HFY22, stood at 0.76mmt (+1.9%YoY; +1.6% QoQ) and 1.51mmt (+0.7% YoY) respectively. Backed by on-going EOR programs, OINL is looking forward to improving production to above 3mmt in FY23 and onwards.

* Natural Gas Production: The natural gas production for 2QFY22 and 1HFY22, stood at 8.4mmscmd (+31% YoY; +12.4% QoQ) and 7.8mmscmd (+15.5%YoY), respectively. The targeted production over FY23-24 is estimated at ~8.5- 9mmscmd, largely on backs of incremental production from nomination fields.

* Capex: OINL has planned capex of Rs 41bn for FY22 and Rs 42bn in FY23

* Dividend: The company declared an interim dividend of Rs 3.5/sh, for FY22

* NRL: NRL’s GRM improved to USD 13.47/bbl in 2QFY22 vs USD 6.68/bbl in 2QFY21 and USD 5.21/bbl in 1QFY22.

Valuation

We value OINL at a Mar’23 TP of Rs 185/sh on SOTP basis, where the standalone business is valued at Rs 75/sh and investment in NRL at Rs 65/sh, with listed investment contributing ~ Rs 45/sh. Our TP implies a target P/E multiple of 7.5x FY24e, as compared to 8.9x the stock is currently trading at.

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