Oil India is becoming a global oil company

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Oil India Ltd

Good Q1 performance

Oil India has put up a good Q1 performance for the quarter ended 30.06.11 compared to Q4 ended 31.03.11. Revenue increased from Rs.2096 crore to Rs.2366 crore. Net profit has increased from Rs.562 crore to Rs.849 crore. Operating profit margin increased from 56.72% to 65.25%. Net profit margin increased from 26.83% to 35.91%. The shares of Oil India are traded in the stock markets at Rs.1285.05 now. In November 2010, they were traded at Rs.1471. The company’s net profit jumped by 70% to Rs.849 crore as compared to Rs.501 crore in the corresponding period of the previous year. The company got a gross price of $116.32 per barrel for 0.957 million tonnes of crude oil it produced as compared to $78.10 per barrel gross billing in the corresponding period of the previous year.. After giving fuel subsidy discounts, the company’s net price realisation was $59.55 per barrel as compared to $49.68 a barrel in the corresponding period of the previous year. Oil refineries like Oil India and ONGC bear one third of the losses incurred while selling diesel, domestic LPG and kerosene below cost of production.

Expansion and diversification plans

Oil India is a public sector oil exploring company in India. It is now chalking out an expansion and diversification strategy. It is planning to enter into city gas distribution sector. This is a natural corollary for the company as it already has expertise in laying pipelines and transporting gas through pipelines. It is in a position to enter the domestic gas sector at any time it wants.

Oil sector reforms will give a further boost to the company

Reforms in the pricing of petro products and subsidy sharing will give a further boost to Oil India’s earnings. New oil discoveries will also create value for the company and the investors. Oil India has the Navaratna status. Oil India plans to market its gas directly to the customers. For this, it is planning for a tie-up with a gas marketing company. The strong performance of the company is due to a combination of highly efficient operations in Assam, visibility on production growth, improving realisations and a record high crude price in the international markets. In the next five years, the company is planning to double its gas sales.

Hydrocarbon operations in Cauvery basin

The company has started its hydrocarbon hunt in Cauvery. It has initiated seismic surveys in its offshore block to locate possible areas for further exploration. The company commenced the work in March this year. It has engaged the Norwegian company Bergen Oil Field Service to do the job. Oil India won the Block CY-OSN-2009/2 in NELP VIII. ONGC is the company’s partner with a 50% stake. This is the company’s first offshore exploration activity as an operator under the NELP scheme. The company is initiating a similar activity in its Andaman Basin deep water block. There also ONGC is the company’s partner. Oil India has 65 production and exploration blocks. Out of these 65, 30 are NELP blocks. Out of these, Oil India is an operator in 12. If the company’s focus to enhance the production of crude oil on a sustainable basis and to discover hydrocarbons in the NELP blocks is successful, it will enhance the financial strength of the company and its shareholders. Currently, Oil India produces gas and oil from its Assam-Arakan basin blocks and the Rajasthan-Jaisalmer block.

Wildlife sanctuary is the problem

Oil India has sought the Environment Ministry’s approval to undertake hydrocarbons exploratory activity for KG-ONN-2004/1. For undertaking exploratory activity in the forest area, the approval of environment ministry is required. Oil India was awarded this block under the sixth round of NELP. The company owns 90% of the block. Canadian company GeoGlobal Resources holds the remaining 10% stake. During the first phase of its exploratory activity, Oil India will be spending Rs.1000 crore in the block. There are concerns that undertaking any exploratory activity in the block may have an impact on the wildlife in general and avifauna in particular as Coringa Wildlife Sanctuary is located in the nearby area of the block in Andhra Pradesh State. The block has nearly 566 sq km onshore area in the KG basin, out of which 55 km is in forest area. The exploration period is seven years (four years under Phase I and three years under Phase II).

Expansion abroad

Oil India wants to expand its operations abroad. It has earmarked funds amounting to Rs.4000 – 5000 crore for acquisition of mid-sized oil companies abroad. The company has joined Indian Oil Corporation to acquire exploration blocks in Gabon, Iran, Nigeria, Yemen, Timor Leste, Egypt, Venezuela and Sudan. The company is pursuing opportunities to acquire production assets in Africa, Middle East, South East Asia, South America, Australia, CIS Countries and Russia. It has abandoned its block in Libya after failing to find oil that is commercially viable. The company is also looking for acquiring shale gas prospects in North America. From is domestic fields, Oil India produced 2627 million tonnes of crude oil and 2352 billion cubic metres of gas in 2010-11. It is a cash rich company with a cash balance of over Rs.12000 crore. For the company, overseas acquisition of oil and gas assets is a strategic focus area.

Subsidy burden may come down

Oil India has been putting up impressive performance on the core operating parameters like production growth coupled with efficient operations resulting in low funding and development. The company has healthy and consistent reserve replacement ratios. The only negative factor for the company is its subsidy sharing mechanism with the government, over which it has no control. If oil prices remain stable at the current levels, the overall subsidy burden for the company is expected to come down in the coming quarters because of the recent increase in the price of petro products.

Future capital expenditure plans

Once upon a time, Oil India was basically called a North-East oil company or more specifically Assam Oil Company. But now it is strategically spreading its wings throughout the globe to call itself as a global oil company. Oil India has 26% stake in Numaligarh Refinery in Assam and a 10% stake in Brahmaputra Crackers and Polymers. Oil India owns and manages 1200 km of crude oil pipeline with capacity of around 6 million tonnes per annum. In 2010-11, the company’s capital expenditure in domestic oil and gas exploration and development increased by 45% to Rs.1660 crore. The company is planning to increase it to Rs.2380 crore in 2011-12 and to Rs.3400 crore in 2012-13. It is confidant of discovering several small and mid size oil wells. As the company is a cash rich company as already pointed out, it is not difficult for the company to fund its expand plans.

Good share to acquire at current price

The government‘s stake in Oil India is around 78%. Follow on public offerings may be on the way out to enable government to disinvest a portion of its holdings in this profitable public sector company. At the current market price, one can invest in the shares of Oil India for medium term and long term holdings for decent returns.

Oil India


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