Oil India - Lowest cost producer with higher quality of reserves - IIFL

OINL cost of production for oil and gas is amongst the lowest in the world. This is mainly on account of the fact that most of the production for OINL is onshore. Further on the quality of reserves OINL has high Oil to gas ratio of 1.76 in terms of 2P reserves. In terms of 3P reserves, the ratio is even higher at 1.80 and better than its peer ONGC's 0.75 signifying better quality of reserves when monetised. Going ahead the company plans to spend more than 32% of the planned capex in the 12th Five Year plan towards exploration which will enhance its current reserve base.

Key beneficiary of gas price hike

OINL has been selling the gas produced from the nominated blocks at administered price of US$4.2/mmbtu, much lower when compared to other blocks such as Panna-Mukta-Tapti and imported LNG. For power and fertiliser players in the North-East, OINL earns only US$2.5/mmbtu. With a view to move the gas pricing closer to market-determined levels, the government is considering to raise prices to US$8/mmbtu. Every US$1/mmtbu increase in gas prices would translate into 6% increase in FY14E EPS for OINL.

Strong cash flow generation... a quality acquisition to act as trigger

OINL is sitting on a cash balance of Rs139bn at the end of Q2 FY13. Further, the company is expected to generate free cash flows of Rs88bn cumulatively in FY14 and FY15. This would get further boost if the under recoveries fall higher than expectations and net crude realizations surge beyond our current estimates. Additional surge would arise from higher than assumed increase in gas prices. In such a scenario the management is looking for deploying the cash in quality E&P assets which will be a potential trigger for the stock.

To benefit majorly from the subsidy pruning steps

With high fiscal deficit straining government's balance sheet, the urgency on government's part to cut subsidies looks unprecedented. Moves to cap LPG cylinder consumption and laid out plan to cut under-recoveries on diesel have been positive surprises. While we concede that in a packed election year such non-populist measures are not easy to implement but we note that every hike in diesel prices reduce the subsidy burden of OINL and aide profit growth.

Source : Equity Bulls

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