OIL India – Hold – Target Rs 1200 – Motilal Oswal

Oil India Limited (OIL), engaged in exploration, development, production and transportation of crude oil and natural gas in India listed on the exchange today and we had a SUBSCRIBE Recommendation for the IPO. OIL has 2P reserves of 974mmboe, with ~94% of these located in North East India. It has 26% stake in Numaligarh Refinery and 10% stake in the under-construction Assam Gas Cracker Project, Brahmaputra Cracker and Polymer Limited (BCPL).

The management has indicated annual growth of 4-5% in oil production (currently 27mmbbl per annum) for the next 2-3 years and doubling of gas production to 4.5bcm by FY14. OIL is more than adequately funded for its planned capex of ~Rs50b (US$1b) over the next two years – it has cash on hand of Rs60b (US$1.3b) and significant operating annual cash flows of ~Rs33b.

Crude oil accounts for 60% of OIL’s 974mmboe 2P reserves. Also, its 1P reserves are 55% of its 2P reserves as against 78% for ONGC, indicating larger scope for increase in 1P reserves. OIL has an impressive exploration track record, with success rate of over 60%, reserve replacement ratio (RRR) of over 1.5x, and R/P (total reserves / annual production) of over 24 years. Of its 109,498sqkm domestic acreage, 72,641sqkm lies in the highly prospective deep waters. OIL has an impressive finding cost of US$1.1/bbl and lifting cost of US$5/bbl.

Apart from indicated production growth in the medium term, possible gas price hike and subsidy rationalization could trigger a stock re-rating. OIL would have cash of Rs370/share (post-IPO) on the balance sheet by end-FY10 and dividend yield of ~3%. At the IPO price of Rs1,050/share, OIL is valued at 9.6x FY11E EPS of Rs110 and at an EV of 4.8x FY11E EBITDA. Compared to ONGC’s EV (2P basis) of US$4.3/boe, OIL is valued at US$3.7/boe at the indicated price band. MOSL has set a target value of Rs 1,200 based on average of P/E, EV/EBITDA and EV/BOE (2P) valuation metrics.