Add Oil India - Shale gas foray - IIFL

Oil India (OIL) and Indian Oil Corporation (IOC) have jointly acquired a 30% stake in Carrizo's Niobrara shale gas acreage (18,000net acres) for US$82.5mn. They paid US$4,550/acre, in line with earlier deals in the Niobrara basin. This implies valuation of $5.7/boe, based on Carrizo's estimate of recoverable reserves of 48mmboe. Share of OIL's production will go up from 370bpd currently to 3.7kbpd in the next 3-4 years- c2.5% of its consolidated production in FY16ii. The acquisition is small, even for OIL's size. We maintain ADD.

Deal valuations attractive at US$4,550/acre and US$5.7/boe; production to peak in 3-4 years: The per-acre cost of US$4,550 is in line with similar deals in the Niobrara play at US$4,800-$5,000/acre in the past. Carrizo estimates recoverable reserves at 48mmboe, implying deal valuation at US$5.7/boe, which is fair in our view. OIL and IOC will pay upfront cash of US$41.3mn and US$41.3mn more in the form of drilling carry over the next 1.5 years. Our calculation suggests they need to invest an additional US$225mn in the next 3-4 years for development. Oil India holds 20% stake whereas IOC holds remaining 10%.

Niobrara is liquid rich, but a relatively new play: Niobrara is a liquid-rich, shale gas play with 80% reserves in liquids and 20% in rich gas. It is also a smaller play compared with other liquid-rich plays such as Eagle Ford with only 29 horizontal rigs under operation against more than 220 rigs in the Eagle Ford formation. Further, it is relatively a newer play with focus on drilling in the formation in the past two years. Carrizo estimates a total of 242 wells to be drilled in Niobrara of which 24 have been drilled and are in production. Current production from these wells is 1.9kbpd.

Acquisition would add 2.5% to OIL's FY15 production, Maintain ADD: OIL expects peak production of 3.7kbpd from the acreage by FY16, which would form 2.5% of its overall production. The acquisition is small even by OIL's standards and leaves considerable room for the company to pursue bigger targets. Meanwhile, near-term production growth is subject to commissioning of the Carabobo project in Venezuela next fiscal. The likely divestment of stake by GoI in OIL would be a near-term overhang, in our view. We maintain ADD with target price of Rs520.

Source : Equity Bulls

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