OIL INDIA : Strong on Pricing, but Headwinds Still Remain

Among the three upstream petroleum firms Oil India stood out with its outstanding results for the June 2011 quarter. The company’s improved profitability came not only from higher realisations, but also from a significant jump in production. This comes as a pleasant surprise at a time when the country’s biggest oil producer ONGC is struggling to maintain its output.
Oil India’s profits jumped 70% to . 849.6 crore during the June ’11 quarter. This was a significant feat considering the other two upstream petroleum PSUs — ONGC and Gail — could post profit growth of just 11-12%. A part of Oil India’s superior performance came from the higher oil price that it realised from sale of every barrel of oil compared to its bigger peer ONGC after accounting for the discounts they both had to extend towards the industry’s under-recoveries. ONGC could realise $48.76 per barrel after deducting $72.53 as discount, whereas Oil India’s net realisation stood higher at $59.55 per barrel after $56.77 as discount.
However, higher realisations were just one reason for the jump in profits. Oil India’s oil production shot up almost 20% to 0.96 million tonne and natural gas production up 16% to 642 million cubic meters during the quarter. The company benefited from the low base effect of last June quarter, when its key customer — the Numaligarh refinery — had remained shut down for an extended period.
For Oil India, the production growth in near future will depend on its ability to find newer customers. A large chunk of the increase in gas production during the June ’11 quarter was thanks to the completion of Duliajan-Numaligarh pipeline supplying 0.86 MMSCMD to the Numaligarh refinery. The Brahmaputra Cracker project, which is expected to be commissioned in July ’13, will enable the company to raise output by another 1.35 MMSCMD.
Oil India remains a top bet, with most of the broking firms due to its ability to improve production and earn a better price. However, with the government considering various alternatives to the method of calculating future subsidy burden, it could face headwinds. “Sharing of subsidy among upstream firms may no longer be based on profit but may be based on oil volumes. Any such changes may cut FY12E EPS growth of Oil India (OIL) to 6-9% from 24% in the base case,” mentioned a BoA Merrill Lynch report.