Oil India- has its time come?

Stock Opportunities Special Situations
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Usually I am a value investor. The first thing I look for is the stock’s PE and ROE/ROCE. This has also caused me to miss many momentum picks. For example the defence and the PSU rally has passed me by. The Railway PSUs have also failed to enthuse me.

As the FOMO becomes stronger, I have looked for a PSU which has good, if not excellent return on equity, and not sky-high PE.

I am learning, and my poser to the class is- have we ignored this hidden gem?

The basics first. The PSU has a Market Cap of ₹ 21,932 Cr. It is is engaged in exploration, development and production of crude oil and natural gas, transportation of crude oil and production of LPG. It also provides various E&P related services for oil blocks.

The sale of crude oil accounts for ~76% of revenues, followed by Natural Gas (18%), transportation (pipeline) (~3%) and others (3%).

The company owns stake in 60 blocks in India(https://www.bseindia.com/bseplus/AnnualReport/533106/66279533106.pdf#page=54) and 12 blocks in overseas countries like US, Nigeria, Venezuela, Russia, Bangladesh and others.(https://www.bseindia.com/bseplus/AnnualReport/533106/66279533106.pdf#page=58)

As on March 2020, the company has 2P (proven and probable) reserves of ~75 million metric tonnes (MMT) and ~60 billion cubic meters (BCM) of crude oil and natural gas respectively. Its overseas 2P reserves are ~25 MMT and ~22.5 BCM of crude oil and natural gas.
Reported Consolidated quarterly numbers for Oil India are:

Net Sales at Rs 8,258.72 crore in September 2022 are up 13.85% from Rs. 7,254.12 crore year to year.

Quarterly Net Profit at Rs. 1,896.19 crore in September 2022 up 64.65% from Rs. 1,151.63 crore in September 2021.

EBITDA stands at Rs. 3,043.39 crore in September 2022 up 22.7% from Rs. 2,480.42 crore in September 2021.

Oil India EPS has increased to Rs. 17.48 in September 2022 from Rs. 10.62 in September 2021.

OIL has also generated revenue of Rs. 131.67 crores in FY 2021-22 from its Renewable Energy Plants.

https://www.oil-india.com/Renewable-energy

As per the Company, the capex for the next year that is FY2023 is already locked out around Rs.4300 Crores. NRL, a subsidiary of Oil India, has on the extension project spent about Rs.3000 Crores, Rs.900 Crores in last financial year and current year up to December Rs.2100 Crores and this year the plan is to invest around Rs.3600 Crores that is another about Rs.1500 Crores will come in the Q4.

NRL total capex for this project for this refinery expansion is about Rs.28,000 Crores plus and for the target for current year cumulative target for the current year cumulative target is aroundRs.4500 Crores. Rs.900 Crores we have already spent last year. Rs.3600 Crores is the capex target for current year.

It has received a dividend of ₹242 cr from IOC, and from OIPL Rs.265 Crores. Dividend from NRL is Rs.265 Crores.
Risks
The reputation for sloth and inefficiency in the case of PSUs are the greatest risks in making an investment in PSUs. This could be one of the reasons for the investors in general not trusting the PSUs.

Secondly, the PSUs have no freedom to take commercial decisions. Recently, Govt by imposing the windfall tax on the oil companies. This resulted in the fall of their shares. Even withdrawal of such policies leaves the investors shaken as they fear that their well-thought investment decisions may come undone at the whim of the babudome. Similar thing had happened in the case of IRCTC also recently.

Why OIL India and why not ONGC

To me OIL appears to be more efficient in utilisation of the capital. ONGC’s PE at 4.67 is practically double that of OIL at 2.72. The ROCE of ONGC is 16.8%, which does not compare favourably with the ROCE of OIL at 21.6.

In any case, the story of ONGC is too well known. It is OIL which is crying for attention of investors.

Many well known brokers have recommended investment in this company.

JM Financial has recommended buying it with a target of ₹255.

HDFC Securities have a target of ₹255 too.

Prabhudas Liladhar has a target of ₹300.

Now the financials I always look for: the PE is 2.73. The ROE is 20.4%. Though not great, it compares favourably with many PSUs now being touted up. The ROCE is 21.6%.

Compounded Profit Growth
10 Years: 5%
5 Years: 18%
3 Years: 12%
TTM: 72%
The share is now submitted to the forum participants for a discussion.

Disclaimer: I have made a small investment today.

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You could have added some info on ONGC and made combined thread for both as both of them share same business dynamics. Also, add some risks else the thread will be closed.

Anyways, I believe these two upstream companies are good bet and are cash cows but market has somehow never recognized it. Maybe because of change of govt policies, etc. These two have not given returns since last 10 yrs.

Disc: Invested.

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Was going through the screener and found this company. First thing i did was come to forum.
Mainly noticed it cause of such beaten down PE.
On a starter the company looks available for literally a cent on dollar if someone was to look at recent past year earnings.
On a brief look at balance sheet also we can see that the reserves are so huge in terms of almost liquid cash and investments that even with 17K CR borrowings the company is literally available for free.

On an other hand, if one would think why something be so miss-priced, we can argue that there is not much actual growth in terms of business(extracting crude). The bloated profits are due to the movement of oil prices. If prices were to return to previous of 75$ a barrel the profits would fall down.
A better thing to think would be how the future of oil prices look. If the prices of even 100$ will be sustained, the company at current valuations would be a gem.

Still at the current valuations I don’t see a huge downside risk.

Disclaimer: Not invested.

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Some very good insights on oil and its future.

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So here is the write-up on the OIL / say my investment thesis - Not Invested

So the Narrative first

Positives : -

One of the only 2 listed OIL exploration / up-stream oil companies in India. The other one is NIFTY stock - ONGC. Though the Indian Govt is hell bent on reducing oil dependence through SOLAR / WIND / HYDRO energy, oil is still a MUST for any country. And if it’s produced within the country, whatever small amount is always welcome. So the company will always have the GOVT support.

Oil is situated in NE region of INDIA. And due to geo-political reasons, GOVT will always push to protect & develop that area. But also being in the NE region, this exposes potential terrorist activities.

About oil, what people don’t realise is that almost 70-90 % of chemicals / plastics / pharma drugs / agrochemicals are STILL produced from oil. So not only is it essential, but it’s also indispensable / irreplaceable.

No country can afford to lose such an asset by any means.

Being a PSU, good dividend yield.

Negatives: -

This is a very capital intensive business.

You have to find the wells, dig them to know their potential, then finalise which ones to drill and then transport the crude and REPEAT. All this is very CAPEX heavy.

Another major negative for the market is its PSU. So not at all investor friendly. Govt. may keep on diluting its stake which will cause regular oversupply in the market and hence no price appreciation.

Being a PSU, Govt squeezes every penny out of it through dividends. And even if you earn more from increased oil prices, it will put the WINDFALL TAX on you.

The most important negative is Oil being a commodity, it’s hard / nearly impossible to predict its future movement.

Now Numbers

Recent Golden crossover in technical term.

This is what surprised me the MOST. Check these numbers. They are great considering such a cyclical industry.

Check the FLOAT.

Now PE RATIO

p/b ratio

p/s ratio

So all these parameters are trading at near all time low.

So it looks like a safe bet , the way Mohnish Pabrai says - Heads I win, Tails I don’t lose much.

All are my personal opinions.

I am just tracking it & not invested as of today.

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The stock also shows the virtue of patience. On Nov 25th 2022, it was ₹199. Today it is ₹239!
Once we have made a good, well-judged decision, we should not get impatient or let the fear get hold.

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I have some points on the negatives you mentioned.

  1. The high capex business.
    Yes, oil exploration and extraction is an capital intensive business. We must also consider the current ESG concerns when we think about this. With current momentum of going towards green energy, government would not do high capex on exploration of new oil fields. Yes capex would be used for extraction, which is a smaller part of total capex. It is in a way time to grab the low hanging fruits now(extracting oil from current and already explored sites).

  2. Being a PSU.
    This is a concern for me but a different one. Oil is an important resource for an country and if this is also providing good dividend yield govt would not think much about divestment here, which intern would lead to good returns, maybe, maybe not, in terms of stock price. But if everything is being squeezed in terms of dividend, this might be a little concerning, cause of taxation (government will enjoy money in both pockets), for us. Taxation would prevent high compounding.

These are my opinions. And antithesis are very much welcome.

Disclaimer: Invested, might be biased.

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This is a real concern and the petrol vehicles may be outdated sooner than we think. On the other hand, I found that at Buxer, L&T is constructing a Thermal Power Station for SJVN. When I asked the authorities, they said, the project had been approved long back. I had my doubts as the reconsideration of the project may be less costly than having to scale down the Thermal Plant lateron. I suppose it would be run on coal! So, govts do not always run on logic.
Added to this is the fact that automakers like Maruti are coming out with fuel guzzlers, as bigger and bigger SUVs (keeping up with the Joneses) are the norm.

On the whole I agree that the days of the fossil fuels are limited, and the green energy may be the main driver sooner than I think.
Till that time, till we have to import oil from Russia forsaking the moral high ground, or from Gulf, OIL or ONGC may still have their days in the sun.

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Actually i was not thinking about logical scenario on ESG topic. I was thinking more on the lines of India is a forerunner of green energy initiatives. A state owned company using large capex on new oil exploration wouldn’t look good on the world stage, hence less capex. Whereas taking out oil from already explored fields is something more economical and might make sense for economic needs of government. Hence grabbing low hanging fruits. And yes demand for oil is going to go away but definitely not in the near future.

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Here are the latest results

Good results with interim dividend of Rs.10/- announced.

Please opine.

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How can I value the exploration project, any help will be appreciated?

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The ESG initiatives are ironically not sustainable and we will soon know in 2 years once Germany moves to RePower. Oil is geopolitics; what the GOI says versus what will it do is different.

We need oil. lots.

OIL will have to explore and find oil and it will be supported by GOI. If anything, the string of discoveries by GSI over lithium and other minerals is testament that GOI is trying hard to be self sufficient.

While EVs and such are nice, the dominant vehicles will continue to be ICE and that needs oil

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Was having a look at the financial statements of the company and there are a few divisions except the exploration part of their business that I believe can be a significant booster for the Company.

1. Dividends from Indian Oil Corp. (IOC):

Oil India holds a 5.16% stake in IOC that as of today is valued at approx. 6500 Crs. as of today. The holding co. the gap will sustain but what I believe is that the dividends from IOC are going to substantially increase due to the following reasons:

  1. IOC has had a very good quarter and is definitely going to have a very good Q1FY24. I believe even the next couple of quarters are going to be moderate. This will lead to IOC paying far greater dividends than last year when IOC made a ver tiny PAT.

  2. Three very major expansions of IOC are going to be completed in the next 5 quarters (SOURCE: Motilal Oswal Report):

  • Barauni refinery expansion in April 2023 of 3 MT

  • Gujarat Refinery in Aug 2023 of 4.3 MT

  • and lastly and most importantly Panipat refinery in Sept 2024 of 10 MT.

This should provide significant profits as refinery margins are still way above average.

  1. Finally, IOC’s capex as compared to previous years is going to fall.

This article outlines this. It should provide further free cash flow to them.

2. Numaligarh Refinery Limited (NRL) expansion to be completed:

Numaligarh refinery is going to get expanded from 3 MT to 9 MT in December 2024 as per the management. This should significantly increase their income from refineries.

NOTE: In addition to refinery income, the expansion will also allow Oil India and other North East based exploration companies an outlet for their Natural gas that they can’t produce to their optimal capacity as there is a lack of demand in the region. You can read about this in detail in HOEC’s earnings calls where they talk about how they have the capacity to produce above 40 mmscfd of gas from Dirok but they can only produce 30 mmscfd as there is no outlet for the gas to be consumed.

3. Pipeline income:

This is something that really seems to be unnoticed:

Screenshot 2023-06-14 at 2.25.48 AM
Screenshot 2023-06-14 at 2.25.48 AM2630×1588 419 KB

As you can see in the last two quarters the pipeline income has gone up significantly. This is most ostensibly because of the India-Bangladesh pipeline completion. I am not 100% sure about this as the management doesn’t really talk about this segment elaborately.

In addition to this pipeline, the Indradhanush pipeline is also going to get completed in phases over the next 2 years. Oil India owns 20% of it directly and 20% through NRL. They are most certainly not going to earn super normal profits on this pipeline but this should add to the PAT as the size of the pipeline Capex is quite huge.

CONCLUSION:

These are the three elements except the exploration part of their business which seems to be quite unnoticed and can provide a surprise to their earnings. These in addition to their target of increasing their oil production by 30% and gas by 60% in the next two years can lead to a disproportionate increase in their EPS and share price. Just for the record, I am not confident that they will be able to achieve their production targets, but they did increase their oil and gas production by approx. 4-5% even when ONGC’s production fell.

DISCLOSURE: I started accumulating the stock from 170 levels last year and still have a target of 30-40% upside in the next two years (this is excluding the 5-7% dividend).

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Just went through the earnings call and came across a few things that will have a substantial effect on the next quarter’s results:

  1. Gas production fell by 3.5% due to the shutdown of the Numaligarh refinery and a couple of other fertilizer plants. This will be normalized in Q2 as NRL is operating at more than 100% levels.

NOTE: This makes me even more bullish about the effect of the commissioning of the Indradhanush pipeline on OIL. The commissioning will lead to increased offtake of natural gas to the rest of India and prevent lower offtake of gas that happens for one quarter every year due to the shutdown of NRL and other regional fertilizer plants. The management mentioned that a part of the new pipeline will get commissioned in December this year.

  1. Oil Sales as a % of production was at 91% against a normalized level of 96-98% because of the buildup of inventory at the Numaligarh refinery. This inventory will be sold in Q2 and will lead to a windfall.

  2. The increased production of nearly 3-5% every quarter is very encouraging as this will change the perception of Indian Oil PSUs which have depressed valuations due to the historical fall in production every year. This also leads to a disproportionate benefit as the new production is not burdened by the windfall tax and will be sold at a substantially higher rate.

This also applies to new natural gas production which will get a 20% premium to the current APM prices.

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Link for the latetst AGM

And here is the latest AGM notice

Just sharing

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at cmp~340,This has doubled from 170.

While, Oil India Limited is strategically planning to diversify its operations, expand its reach in the energy sector, embrace green technologies, and actively engage in the evolving landscape of renewable energy and electric vehicles in India.

  1. Gas Infrastructure: Establishing an integrated gas grid in the Northeast.
  2. Pipeline Efficiency: Creating a dedicated gas pipeline to Numaligarh Refinery for better market access.
  3. Market Expansion: Upgrading crude oil and product pipelines and increasing capacity at NRL.
  4. City Gas Distribution: Developing CGD networks in Assam, Haryana, and Maharashtra.
  5. Petrochemicals: Expanding the portfolio of petrochemical derivatives.
  6. Green Energy Diversification: Venturing into green hydrogen, compressed biogas, and bioethanol.
  7. Renewable Focus: Embracing solar, wind, geothermal, and CCUS technologies.
  8. EV Revolution: Actively participating in India’s electric vehicle revolution.

Does it mean rather just being on PSU rally, oil india has longer way to go & current rally is sustainable ?

D-Invested ~190 level.

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The screener shows intrisic value of the stock at ₹1531 (today’s price ₹419). For that matter, they show the intrisic value of Chennai Petro at ₹2474 (current price ₹830).

Can anybody advise if there is any rational basis for calculating this? To me, the life of the investor depends on a stock’s intrinsic value, and there is no sure shot way of calculating it.

So, are they only guessing?

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I found another intrinsic value ~Rs.559
image

Heres site which claims to be offering valuation screener, in case someone has experience with it >Intrinsic Value Calculator - Alpha Spread

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So, of course, these figures are not reliable.

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This is really good. Saving the link. Thanks.

But it allows you to check only three stocks free. After that the monthly charges are very high.