Oil India

Oil India (OIL) may not be in the same league as Oil and Natural Gas Corporation (ONGC) in terms of its size of business, extent of reserves or scale of operations.

Where it scores over its big brother though is in its ability to show a growth trend in crude oil production and in adding to its reserves, more than what it produces every year.

OIL’s offer at Rs 950-1050, is at a fair valuation that compares favourably with its peers on most parameters. The offer band is at a price-earning multiple (PEM) of 9-10 times the 2008-09 earnings. ONGC has a valuation of 16. OIL also compares favourably on price-to-book value terms with a ratio of 2-2.2; ONGC’s is at 3.2.

Unlike other recent IPOs, OIL has left something on the table for investors. Investors can subscribe at the cut-off price and hold the stock for the medium-term.
Old oil

OIL owns and operates the first ever oil field discovered in India back in 1889 in Assam. All the oil that it now produces — 24.95 million barrels a year or about 68,000 barrels a day (10 per cent of domestic oil production) — comes from the Upper Assam oil field, parts of which are well into the decline phase.

In comparison, ONGC produces more than 5,50,000 barrels a day while Cairn India, which commenced production last week, will produce 1,75,000 barrels a day at its peak. OIL has ‘proved and probable’ reserves of 575 million barrels of oil, which will last 23 years at the current rate of production. The proven reserves alone will last 11 years at the current output level.

Besides this, OIL also has gas reserves of 63.41 billion cubic metres, more than 93 per cent of which is located in the Upper Assam Basin.

It produces 6.22 million cubic metres of gas a day, which was about 7 per cent of domestic gas output in 2008-09. In comparison, Reliance presently produces close to 40 million cubic metres of gas a day.

OIL has a small presence in Rajasthan where it produces about 0.56 million cubic metres of gas a day. It also owns reserves of heavy oil that it has yet to develop.

The company is also a 26 per cent shareholder in Numaligarh Refinery and holds 10 per cent in Brahmaputra Cracker and Polymer Ltd., which is planning to set up a petrochemical project in Assam.
Lagging in E&P

OIL has interests in 24 blocks that were acquired under various NELP (New Exploration Licensing Policy) rounds and it is the operator in 12 of them. The blocks where it holds majority interest are concentrated in the Upper Assam Basin and in Rajasthan.

Some of these date back to the first few rounds of NELP, which began in 1999. Yet, the activity is still in the initial stage of seismic studies in most of these blocks. In the last two years, it has managed to drill just 23 exploratory wells in all.

Despite this, the company has been regularly adding small discoveries to its reserves, mainly in the Assam region. A more aggressive pursuit of exploration is required if OIL is to scale up in terms of size.

The company has also acquired blocks for exploration abroad in consortium with partners such as Indian Oil, Reliance and GSPC.
What augurs well

Despite its only producing asset being a mature field, OIL has managed to grow its output in the last few years. In 2008-09, its production grew 11 per cent.

The company has effectively employed improved and enhanced oil recovery techniques to coax oil out of wells that are past their productive phase.

It may not have made big discoveries, but OIL has consistently managed to replace the oil that it produces every year through new, small discoveries. It boasts a reserve-replacement ratio of almost two thanks mainly to its conscious strategy of going in pursuit of small-sized reserves of up to 30 million barrels.

OIL is sitting on promising gas reserves in the Assam fields which it has been unable to monetise due to poor demand in the region.

A conscious attempt to link the region with the national grid will enable the company to exploit its gas reserves effectively.

The company discovered heavy oil in the Baghewala field in Rajasthan back in 1991 but it has not exploited the reserves due to technology constraints.

Pilot production has been started now and, hopefully, OIL, like Cairn, will be able to produce heavy oil from Rajasthan soon.

Adding a measure of comfort is the huge cash pile (Rs 6,568 crore) that the company is now sitting on. OIL is a zero-debt company and it can use the free cash and also leverage its equity to raise more funds to accelerate its exploration work.

The cash reserves could also come in handy if the company were to identify good acreages or discovered blocks for acquisition. Incidentally, the existing cash can comfortably cover the company’s exploration and production budget of Rs 4,560 crore for 2010 and 2011.
The risks

The biggest risk that OIL faces is government policy on sharing of subsidy on petroleum products. The company had paid a stiff price on this front in the last few years.

For instance, in 2007-08 and 2008-09, it provided discounts of $25.08 and $26.13 a barrel respectively. This was apart from the discount that it had to give on its LPG production.

The discount liability fell sharply in the first quarter of the current fiscal mainly because it has now been restricted to the subsidies provided on petrol and diesel only.

There is a risk that the government will revert to its old policy of sharing all subsidies, including on kerosene and LPG, with the upstream companies such as OIL bearing a third of the burden. This could have a significant impact on the earnings of OIL.

With almost all its productive assets, including the 1,157 km crude oil pipeline, located in Assam, there is a concentration risk because of the inherent political instability in the region.

The pipeline has been blasted by militants in the past severing a vital mode of reaching OIL’s crude to its buyers.

The company is viewed as not being an aggressive player on the E&P front. The large cash reserve that it has now parked in low-return government securities is proof of its inability to deploy funds for growth.

OIL will have to quickly find better uses in its business for the surplus cash that can be used to accelerate E&P activity in blocks outside Assam.

via BL