Oil India IPO Analysis

On slippery ground

With peak oil prices behind, little scope for volume growth, and government-imposed non-transparent subsidy sharing burden, the offer is not exciting

Oil India was incorporated as a private limited company on 18 February 1959 as Oil India Pvt Ltd, with Burmah Oil Company holding two-thirds of the equity share capital and the president of India the remaining one-third. Oil India Pvt Ltd transformed into an equal partnership joint venture company between Burmah Oil Company and the president of India in 1961 with the transfer of certain equity shares by Burmah Oil Company to the president of India. Following the enactment of the Burmah Oil Company Act, 1981, the equity shares held by Burmah Oil Company were transferred to the president of India. Oil India, thus, became a wholly owned government company.

The second largest oil-and-gas company in India as measured by total proved plus probable oil and natural gas reserves and production explores, develops, produces and transports crude oil and natural gas onshore in India. Oil India also processes captive natural gas production to extract LPG. It has an international presence in exploration of crude oil and natural gas through participating interest in 17 exploration blocks in Egypt, Gabon, Iran, Libya, Nigeria, Timor Leste and Yemen.

Oil India owns and operates as a common carrier, a 1,157-kilometer cross-country crude oil pipeline, on behalf of itself, ONGC and Bongaigaon Refinery and Petrochemicals (BRPL). The pipeline has the capacity to transport over 44 million barrels of crude oil annually. It transported approximately 45 million barrels of crude oil to four public sector refineries in Digboi, Numaligarh, Guwahati and Bongaigaon in the north-east region in the fiscal ending March 2009 (FY 2009). The company also owns and operates a 660-kilometer petroleum product pipeline, commissioned in August 2008, connecting Numaligarh Refinery (NRL) to Siliguri in West Bengal.

With interests in downstream activities through a 26% equity stake in NRL, a 10% in Brahmaputra Cracker and Polymer (BCPL), and 23% in DNP, Oil India also owns a 10% equity holding in a 741-kilometer pipeline construction project in Sudan completed in 2005. The company also offers various exploration and production-related services to the international and domestic oil and gas industry including pipeline construction, pipeline consultancy, drilling and well work-over, research and development, and logging services.

Oil India is coming out with an initial public offer (IPO) to achieve the benefits of listing and to fund requirement for FY 2010 and FY 2011 for exploration and appraisal; development of producing fields; and purchase of capital equipments and contracts for facilities. Through the IPO it will be raising around Rs 2700 crore. The total funding requirement is Rs 2210.07 crore in FY 2010 and Rs 2349.78 crore in FY 2011. Though the company has cash and bank balances of around Rs 6000 crore for the past three years, its capex was relatively low at Rs 849.60 crore in FY 2009, Rs 942.20 crore in FY 2008, Rs 937.03 crore in FY 2007 and Rs 610.84 crore in FY 2006.

Crude-oil production of Oil India has remained stagnant over the last five years, with production of 24.95 million barrels in FY 2009 compared with 22.38 million barrels in FY 2008, 22.17 million barrel in FY 2007, 22.71 million barrels in FY 2006, and 22.36 million barrel in FY 2005. Growth in natural gas production too is not impressive: 2.27 billion cubic meters in FY 2009 compared with 2.34 billion cubic meters in FY 2008, 2.26 billion barrel in FY 2007, 2.3 billion barrels in FY 2006 and 2.3 billion barrels in FY 2005. Oil India's crude-oil production stood at 6.34 million barrels, while natural gas production was 0.6 billion cubic meters in the quarter ended June 2009.

Although the average benchmarked price of crude oil increased 42% from US$ 59.54 per barrel in FY 2005 to US$ 84.83 per barrel in FY 2009, in line with the rise in international crude oil prices, net realisation of Oil India increased only 27% to US$ 41.22 per barrel in FY 2009 compared with US$ 32.56 per barrel mainly due to sharing of under-recoveries of the oil marketing companies as a result of subsidies on petrol, diesel, public distribution system (PDS) kerosene and domestic LPG. Oil India shared under-recoveries of Rs 3023.29 crore in FY 2009 compared with Rs 2305.09 crore in FY 2008, Rs 1993.75 crore in FY 2007, Rs 977.49 crore in FY 2006 and Rs 704.59 crore in FY 2005. Net realization stood at US$ 39.45 per barrel, while under-recoveries shared was Rs 57.61 crore in the quarter ended June 2009.

Oil India's independent exploration and development areas include 16 nomination blocks located in Assam and Arunachal Pradesh along with 24 blocks acquired through bidding in the New Exploration Licensing Policy (NELP) and participating interest in two pre-NELP joint ventures. Additionally, the company conducts exploration and development on the 19 petroleum-mining leases. Out of the 24 blocks acquired through NELP bidding, it is an operator in 12 blocks with total area of 21,293 square kilometers and a non-operator in the rest of the 12 blocks covering 82,175 square kilometers. Two pre-NELP joint venture blocks cover an aggregate area of 6,030 square kilometers.

Oil India current proved plus probable (2P) reserves of crude oil stood at 575.40 million barrels in FY 2009 compared with 587.77 million barrels in FY 2008 and 539.66 million barrels in FY 2008. 2P natural gas reserves stood at 63.41 billion cubic meters in FY 2009, 54.94 billion cubic meters in FY 2008 and 46.04 billion cubic meters in FY 2007.

Strengths

Had historically not elected to focus on developing natural gas on lack of demand. Now intends to focus and monetize natural gas resources in the Assam basin by doubling production in three to four years.

Reserve accretion reserve replacement ratio was 1.64 in FY 2009, while it was greater than 2 for the previous five years.

Success rate is 63.6% compared with around 36% for ONGC.

Finding cost is around US$ 1.1 per barrel compared with around US$ 2.25 per barrel of ONGC.

Weaknesses

Total independent 2P oil reserves as well as 93.66% of independent natural gas reserves are located onshore in the upper Assam basin in Assam and Arunachal Pradesh, making it over-dependent on one region, which is also prone to insurgency.

Has very limited experience in offshore exploration and development.

Benefits of higher crude prices are being capped by increased amount of sharing of under-recoveries of the oil marketing companies as a result of subsidies on petrol, diesel, PDS kerosene and domestic LPG. If crude oil prices go down significantly, will suffer to the full extent.

Lifting cost is US$ 7 per barrel compared with US$ 3 per barrel of ONGC.

Crude oil production is expected to remain stagnant over the next few years.

Valuation

At a price band of Rs 950-Rs 1050, the P/E works out to 10.2-11.3 times on an EPS of Rs 93 for FY 2009 on post-issue equity of Rs 240.45 crore compared with ONGC's P/E (on FY 2009 EPS) of 15.6. ONGC is almost 10 times Oil India's size and will continue to trade at premium to Oil India Unless oil sector reforms are carried out and upstream companies are freed from sharing subsidy burden, ONGC's valuations look stretched.

FY 2009 was the best year for crude oil prices. As not much growth in volume is expected in the next few years, Oil India cannot be expected to show any significant growth in earnings over the next few years unless oil-sector reforms happen and they turn out to be favorable for upstream players.