Oil India rating – Sell: Firm’s results were muted yet again

OIL’s EBITDA was sharply below our expectations in Q4FY21 led by lower oil and gas volumes and higher operating expenses; net income was boosted by higher dividend income. We raise our FY2022-23 estimates factoring in higher global crude prices and domestic gas prices. However, we retain our Sell rating with a revised SoTP-based Fair Value of Rs 125 (6X standalone FY2023e EPS plus the value of investments), noting an uninspiring production track record, weak free cash flow generation and muted return ratios.

Q4FY21 results impacted by lower volumes and higher other expenses
Revenue was 3% below our estimate at Rs 25.8 bn. Ebitda was 33% below our estimate at Rs 4.17 bn reflecting sharp 26% q-o-q and 31% y-o-y jump in other expenses due to higher cost of support services and a sharp jump in miscellaneous items. Reported net income of Rs 8.48 bn (EPS of Rs 7.8) was boosted by (i) higher other income including dividends from IOCL and NRL and (ii) lower DD&A expenses. OIL accounted exceptional cost of Rs 701 mn pertaining to the blowout at Baghjan.

Crude oil sales volumes declined 6% y-o-y to 0.703 mn tons reflecting 5.4% decline in production to 0.717 mn tons. Gas sales volume increased 4.5% y-o-y to 555 mcm, higher than 0.6% increase in production to 649 mcm. Net crude realisations were in line with our assumption at $59.8/bbl and gas realisation remained steady q-o-q at $2/mn BTU.

Lower volumes & realisations mar FY21
In FY2021, revenues declined 29% y-o-y to Rs 86.18 bn and recurring Ebitda declined 60% y-o-y to Rs 18.85 bn underpinned by (i) a sharp plunge in oil and gas realisations; (ii) lower oil and gas volumes; and (iii) higher operating expenses. Reported net income fell by 33% y-o-y to Rs 17.42 bn (EPS of Rs 16.1). Crude oil realisations declined 28% y-o-y in line with benchmarks to $44/bbl. Natural gas realisations declined 40% to $2.3/mn BTU. Crude oil sales volumes declined 5.8% y-o-y and gas sales volume declined 5.6% y-o-y, both in line with the production trajectory. Net debt increased to Rs 146.5 bn from Rs 53.1 bn a year ago, on acquisition of additional 54.16% stake in NRL.

Raise FY2022-23e EPS on higher oil and gas prices; retain SELL with FV of Rs 125
We raise FY2022-23e EPS to Rs 16.6 and Rs 16 respectively from Rs 8.3 and Rs 9.4 factoring in —(i) higher oil price of $65/bbl and $60/bbl and gas price of $2.7/mn BTU and $4/mn BTU;, (ii) higher operating expenses; and (iii) higher debt and capex. We retain Sell and recommend investors to avoid upstream PSUs given—(i) uninspiring production record despite a sustained increase in capex and operating costs and (ii) limited FCF generation and deteriorating returns.