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E & P track record augurs well

Oil India Limited (OINL) is India’s second largest oil and gas company, contributing ~10% of the nation’s crude oil production. It is fully integrated in upstream activities and has a track record of exploration and production activities. OINL has secured participating interest in 8 countries. It operates 1,157km crude pipeline in NE India to feed refineries in the region; it has also developed 660km pipeline from Numaligarh to Siliguri. Further, gas production from Baghjan field is expected to increase soon. Capex target for FY24 is Rs 49bn on standalone basis; for Numaligarh Refinery (NRL), it is Rs 88bn. OINL targets to be carbon neutral by 2040.

Production: OINL’s crude oil production was 3.176mmt, and natural gas stood at 3.18bcm in FY23. It continues production from its mature and newly discovered oil fields. Towards maintaining and increasing production, it drilled 45 wells in FY23 and carrying out exploration activities in 29 OAPL blocks. Overseas asset of Mozambique is expected to restart, thereby adding to the supply. OINL is targeting 3.5mmt of crude production in FY24, and gas at 3.3bcm and 3.8mmt/3.43bcm for FY25. Volume growth would be supported by Northeast grid which will be completed by FY26. Of the capex of Rs 49bn announced for FY24, 40% is earmarked for exploration and 20% for development. The mature fields have had to grapple with depleting production, albeit new fields have helped maintain production levels.

Numaligarh Refinery (NRL): OINL’s holding in the company increased to 80.16% after it acquired controlling stake from BPCL in 2021. Govt of Assam and EIL own 15.47%/4.37% respectively. It has 3mtpa of oil refinery in Assam. The proposed ethanol production at its biorefinery will help meet the 2025 target of 20% ethanol mixing in gasoline. The capacity is being expanded from current 3mmt to 9mmt, and would be completed by FY26. NRL margins were USD16/bbl in Q2FY24 and we expect a strong GRM environment in FY25e/26e which will be earning-supportive.

Realization: The net crude realization for Upstream companies is capped at ~USD 75- 77/bbl, any price rise beyond invites windfall taxes, which limit their realization. Windfall taxes are calculated on ~15 days price change. The gross crude oil realization in the recent quarter stood QoQ lower at USD 75.5/bbl (Q1: USD 74.3/bbl). The effective natural gas realization for FY24 is at USD 6.5/mmbtu and would be USD 7.0/mmbtu for FY25.

Dividends: The Dividend payout ratio has averaged at 37% for the last 4 years. Dividend yield for last 4 years has been ~7.7% and we estimate 6.8/6.8/5.8% for FY24e/25e/26e. Dividends for FY22/FY23 were Rs 14.3/20.0 per share respectively. We expect payout to rise going forward, given increasing crude prices that would result in peak realizations, coupled with strong contribution from NRL.

Green portfolio: To transit towards net zero objective, Rs 250bn has been allocated, of which Rs 80bn is intended for 2G ethanol. OINL has a JV with Assam for 620MW of solar power plant and collaboration with Himachal Pradesh for 150MW of solar power plant. NRL has placed order for replacing grey hydrogen with green hydrogen, facility with capacity of 20ktpa, Compressed biogas plant would be set up for catering to CGD.

Outlook: We initiate with an ADD rating, and TP of Rs 408/sh, given limited upside on current CMP. Our TP of Rs 403/sh comprises a) Rs 249/sh for stand-alone domestic business, valued on 6.0x PER FY26e (ex-dividends), b) Rs 99/sh for NRL on EV/EBITDA of 6.5x FY26e, c) Rs 61/sh for investment in listed equities, valued at 30% hold-co discount to market price.

Risks: Weaker crude & gas prices, production delays from newer fields, higher volume decline from legacy fields, impulsive overseas acquisitions/investments, and ad hoc changes in government policies.

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