Dalal Street Investments

OIL India – Hold – Target Rs 1200 – Motilal Oswal

September 30, 2009

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.


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