Saturday, February 13, 2016

OIL India: Renewed energy

The rout of crude oil from $115 a barrel in June 2014 to about $30 now has taken a toll on hydrocarbon explorers, including state-controlled Oil India. The company has had it tough for quite some time now — profits declined in fiscals 2014 and 2015 and were almost flat in the first half of 2016.

Falling oil and gas prices, production disruptions due to disturbances in North-East India (its main area of operations), an unfavorable subsidy sharing mechanism, and high cess on crude oil — all played a part. The stock has reacted, plummeting nearly 50 per cent since September 2014. It now trades at less than eight times its past 12-month earnings, compared with the five-year average of nearly 11 times.

Comeback on the cards

But for long-term investors with stomach for risk, this can be a buying opportunity. While oil and gas prices could stay weak or even fall some more in the near term, they are unlikely to remain subdued in the long run. Many hydrocarbon producers, with prices now below the cost of production, may cease operations sooner or later. Also, with exploration budgets being slashed globally in response to the low prices, the supply overhang may ease in a year or two. With many countries readying or intensifying stimulus measures, a pick-up in global economic growth, when it happens, should aid energy demand. So, oil and gas prices can make a comeback and provide a trigger to stocks of explorers such as Oil India.

The company should also be able to get production growth back on track with abatement of local disturbances. Also, the commencement of the BCPL gas cracker project, in which Oil India has 10 per cent stake, will help. Stakes in high-potential international assets, such as the Rovuma gas field in Mozambique can give a leg-up to output.

The subsidy burden on the company should also be much lower than in earlier years — diesel prices have been decontrolled and a formula for sharing the under-recoveries on LPG and kerosene has been laid out. So, oil price recovery to $60-70 a barrel, which may be the new normal, should benefit Oil India by improving its net realizations. Besides, there is hope that the government, in the upcoming Budget, may yield to the clamour for rationalizing cess on crude oil to ad-valorem rates.

Despite its troubles, Oil India’s balance sheet remains healthy with debt-to-equity of 0.4 times and cash of about Rs.9,500 crore as of September 2015.

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