Last week, the Election Commission put on hold the proposed hike in the price of domestic natural gas which was scheduled to kick in from April 1. This move saw the stocks of the three major gas producers in the country — ONGC, Oil India and Reliance Industries — skid somewhat before recouping. These stocks had been gaining over the past few weeks in anticipation of the price hike. Despite this setback, the stock of Oil India presents a good buying opportunity for investors with a long-term perspective.
Pricing positives
One, the setback is likely temporary. While it has been postponed, the possibility of the gas price hike happening over the next few months, once the new Government takes charge, remains strong. The hike, when it happens, is expected to almost double the domestic gas prices from $4.2 a unit currently. At current levels of production, this is expected to add around ₹1,000 crore to Oil India’s annual profit, nearly 30 per cent of the company’s profit for 2012-13.
Next, the monthly diesel price hike which has been happening quite regularly since January 2013 is expected to reduce under-recoveries significantly over the next couple of years. At present, diesel accounts for almost half the under-recoveries; if the new Government stays the course and continues with the monthly price hikes, the under-recovery of about ₹7 a litre on diesel will be eliminated in a little over a year from now. This will benefit not just the oil marketing companies but also upstream oil companies such as ONGC and Oil India, which bear almost 40 per cent of the burden by providing product discounts to the oil marketing companies. In 2012-13, Oil India’s profit was impacted by about ₹4,500 crore due to subsidy sharing. The company’s realisation after subsidy, which hovers just around $50 a barrel, can move up sharply if under-recoveries are reduced in a significant way.
Output growth
The stock of Oil India is available cheap. At ₹478, the stock discounts its trailing 12-month earnings by about nine times, lower than levels it traded at in the past (10-12 times). It is also cheaper than bigger peer ONGC which trades at around 13 times price-to-trailing earnings.
Unlike ONGC, which has rallied almost 14 per cent since the beginning of the year, the Oil India scrip has remained nearly flat. This, in part, was due to shutdown of the company’s operations at many installations in its mainstay Assam fields. This was a result of protests by local student bodies, and caused a 50 per cent drop in the company’s daily output. Reports indicate that production has now been brought back to normal levels.
Until last year, Oil India had been successful in growing its output on a consistent basis; its track record was better than that of ONGC. But in the last couple of years, local protests in the North-East (its main area of operations) have impacted production. However, the company should be able to tide over these problems and raise output again in the coming years. In addition to its onshore producing assets in the North-East, Oil India has significant acreages in other regions of the country, including in the offshore Krishna Godavari basin. Its reserve replacement ratio in 2012-13 was a healthy 164 per cent of domestic assets.
The company’s international forays also bode well and can lead to strong output growth in the coming years. Last year, along with ONGC, Oil India jointly acquired a 10 per cent stake in the giant Rovuma offshore gas block in Mozambique for nearly $2.5 billion (about ₹15,000 crore). The first liquefied natural gas (LNG) shipment from the project is expected in 2018.
Also, Oil India along with Indian Oil has acquired a 30 per cent stake in the producing Carrizo shale gas asset in the US. Besides, in the Carabobo Basin asset in Venezuela, in which the company has a 3.5 per cent stake, production, which commenced in December 2012, is expected to ramp up from 4,500 barrels of oil per day (bopd) currently to 90,000 bopd by end 2015. Oil India has the financial muscle to carry out its expansion plans, and exploration and production activities. The company’s debt-to-equity is negligible and it had a cash balance of about ₹11,600 crore as of September-end. During the nine months ended December 2013, despite a 2.5 per cent growth in revenue, increased operating costs and a higher subsidy burden resulted in net profit declining over 14 per cent.
With the ongoing and proposed pricing reforms, the bottom-line growth should look better in coming years.