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Oil In Media
Poised for well-OILed growth
The Financial Express , April 05, 2010

Oil India (OIL), the second-largest national oil company in India, enjoys multiple growth drivers and yet quotes at nearly half the value of its global peers. We recommend a switch from ONGC to OIL. According to Bloomberg, only half of India's analyst community covers OIL compared to ONGC, following the recent listing. We believe that enhanced coverage and accelerated production growth will trigger outperformance.

Better track record

OIL´s superior reservoir management skills have enabled it to grow production by 5.3% per year over the past two years compared with a 3.1% annual decline for ONGC. OIL´s exploratory success rate of 76% is amongst the best globally and compares with the world average of 20%. OIL's Reserve Replacement Ratio (RRR) of 200%, coupled with 13.5 years life of reserves (R/P), suggests accelerated volume growth of 8% annually going forward.

Multiple initiatives to grow reserves

OIL is implementing improved oil recovery techniques to redevelop its maturing fields in Upper Assam basin, which we believe will grow oil production even in the near term. OIL deploys a wide array of improved oil recovery (IOR) techniques and enhanced oil recovery (EOR) techniques to achieve maximum recovery from oil reserves. We believe these measures have enabled OIL to maintain production rates in its fields in the Upper Assam basin, despite the declining nature of a majority of the fields. By contrast, ONGC's production has been declining, despite high spending to arrest the decline. Because demand for natural gas in the North East is increasing, OIL intends to monetise its natural gas reserves through both upstream and downstream investment.

Doubling exploration

OIL plans to double its spending to explore its large acreage acquired under NELP. OIL plans to drill 44 exploratory wells in FY11, compared with 12 in FY09. We believe that this will sustain growth in the future. In the pre-NELP blocks and NELP blocks where OIL is the operator, it proposes to conduct 316 GL km of 2D seismic data acquisition, processing and interpretation and 1,825sq km of 3D seismic data acquisition, processing and interpretation in FY11.

Monetisation of natural gas resources

Oil India has 94% of its gas reserves in the Upper Assam basin, which is a basin with proven commercial production. In the past, OIL did not focus on development of these gas reserves due to the lack of demand for natural gas in markets within Assam. Because the demand for natural gas in India is increasing,...

OIL intends to commence the commercialisation of its natural gas reserves and resources through both upstream and downstream investment. OIL has entered into a memorandum of understanding (MoU) with IOCL to supply gas to its refinery in Guwahati and for the marketing of gas to small customers through retail networks. OIL intends to participate with IOCL in the development of city gas distribution.

Potential acquisitions

OIL targets to acquire producing properties outside India. Although the value accretion will depend on the target's value multiple, we believe OIL will be able to ramp up its production and reserves profile materially.

The current subsidy share mechanism to fund the under-recoveries on the sale of petroleum products is ad hoc. This results in unpredictable earnings and deters investor interest in the PSU oil companies. However, if the Kirit Parikh committee recommendations are implemented, it would result in transparency, and OIL's realisation should improve at higher crude prices.

Attractive valuations

OIL trades at a large discount to its global peer group on both EV/DACF and PER, despite a superior ROE. OIL trades at EV/reserves of $9/boe and an EV/production of $35k/boepd, which is a 30-50% discount to its peer group. Looking at valuations differently, OIL's current stock price reflects a market assumption of a long-term oil price of ~$65/bbl. In the long run, oil prices are expected oscillate around $75/bbl, which we believe is the level required for major new developments to yield acceptable returns.

Company profile

Oil India (OIL) is the second-largest national oil and gas company in India. OIL is involved in the exploration, production and transportation of crude oil and gas. It also has an international presence through the exploration of crude oil and gas in Egypt, Gabon, Iran, Libya, Nigeria, Timor Leste and Yemen. The company's oil reserves as well as 94% of its natural gas reserves are located onshore in the Upper Assam basin in the states of Assam and Arunachal Pradesh.

OIL owns and operates, as a common carrier, a 1,157km cross-country crude oil pipeline. The pipeline has the capacity to transport over 44m barrels of crude oil annually. OIL also owns and operates a 660km petroleum product pipeline connecting NRL to Siliguri in West Bengal. The company has interests in downstream activities through a 26% stake in NRL, a 10% stake in BCPL and a 23% stake in DNP Limited. OIL holds a 10% stake in a 741km pipeline project in Sudan....