Good upside seen in Oil India stock; most analysts are positive

And their price and fair valuation targets range between Rs 275 and Rs 290

Notwithstanding the windfall tax placing a cap on profits, oil and gas producers like Oil India (OIL) and Oil and Natural Gas Corporation (ONGC) have done well in the October-December quarter (third quarter, or Q3) of 2022-23 (FY23).

ONGC faces the drag of poor results from its subsidiary Hindustan Petroleum Corporation, and in comparative terms, OIL is better off.

Standalone net sales in Q3FY23 stood at Rs 5,900 crore — up 57 per cent year-on-year (YoY), up 2 per cent quarter-on-quarter (QoQ). The earnings before interest, tax, depreciation, and amortisation stood at Rs 2,900 crore — up over 100 per cent YoY, and 54 per cent QoQ — owing to lower-than-expected statutory levies and other expenses.

The adjusted net profit stood at Rs 1,700 crore — up 40 per cent YoY, up 1 per cent QoQ. The net crude realisations after windfall tax were at Rs 6,128 per barrel, about $11.2 per barrel (bbl) — up 7 per cent YoY, 8 per cent QoQ.

The Q3 consolidated gross debt stood at Rs 17,500 crore (flat QoQ). Higher margins came in from lower operational expenditure (Rs 1,000 crore versus Rs 1,430 crore YoY).

Statutory levies were 6 per cent lower due to windfall levies at Rs 6,200 per million tonnes (mt); transportation income was up 85 per cent YoY to Rs 160 crore.  

In Q3, gross crude oil realisations were at $85.8 per bbl — up 12 per cent YoY, down 12 per cent QoQ — while implied net crude oil realisations (adjusted for windfall tax) were at $74.6 per bbl. Gas realisations were at $10.5 per million British thermal units (mBtu) — up 360 per cent YoY, 71 per cent QoQ.

Crude oil prices are tied to the Indian crude basket of imports before windfall tax. Gas prices are set according to formula, which also takes into account benchmarked international gas prices.

The crude basket, which averaged $85.8 per bbl in Q3, was at $97.87 in Q2 and running at around $81.7 in the fourth quarter so far.

The oil and gas production was at 0.81 mt and 0.81 billion cubic metre (bcm). The oil sales volume was at 0.77 mt (up 6 per cent YoY, down 1 per cent QoQ), while gas sales volume was at 0.64 bcm (up 1 per cent YoY, down 2 per cent QoQ).

At the conference call, guidance for FY23 and 2023-24 (FY24) was maintained at Rs 3,000–4,000 crore. The company has guided oil production at 3.2/3.4 mt and gas production at 3/3.3 bcm for FY23/24, respectively. These will be driven by accelerated production from existing fields.

By 2024-25, the production targets are 4 mt for crude and 4 bcm for gas production. The company is planning to drill 70 wells in FY24 and has also made discoveries. The eventual target for gas is 5 bcm. This does not need very large investments, although the execution is difficult in terms of pipeline projects and clearances.

The Numaligarh Refinery (NRL) capacity expansion to 9 million tonnes per annum (mtpa), from 3 mtpa, is on schedule and is expected to complete by end-2025.

The NRL capital expenditure (capex) has so far reached Rs 8,000 crore, of which Rs 2,300 crore is debt-funded, with the rest coming from internal accruals.

NRL has paid Rs 760 crore as dividend to OIL in FY23 year-to-date. The payout may dip due to high capex. OIL’s equity infusion in NRL will be Rs 500-600 crore per annum.

Most analysts are positive. Assuming OIL can maintain at least $65 per barrel in FY24, the price and fair valuation targets range between Rs 275 and Rs 290, which is a comfortable upside.