OIL India Ltd – The India Energy Demand solution | The Banking and Strategy Initiative

OIL India Ltd – The India Energy Demand solution

India’s energy situation in short is that it needs four times more oil than it
produces, and thus domestic production has been a focus in India’s
Infrastructure story since 2005

The OIL IPO band at Rs 950-1050 just ensures an IPO size of Rs 5000 Crores ($1.02
billion) from 11% new shares and 10% sale of existing stakes of
the Government, thus bringing the post issue government stake to 78%,
very close to the ideal target of 75% promoter stake for listed
companies and allowing the government to take down further ownership at
a later stage based on market determined prices. The government will
further sell another 10% of its stake to IOC (5%), BPCL and HPCL.
The IPO monies would thus finance the company’s Capex requirement
for the next 2 years across its exploration contracts in Assam,
Rajasthan ( new fields in management contract with Cairn – the first
Production Sharing Contract) and even its overseas bids in Libya and
Venezuela, not the ones in Nigeria.

OIL is the newest entrant in India’s energy story, following on the footsteps of
ONGC Videsh and ONGC while it has purportedly on paper, more market
friendly organization values and has reserves of $500 billion in the new
NEPC VI fields. However, It has relinquished interest in North
Cachar and other Assam fields award in 2004.

In keeping with India’s Infrastructure story’s imperatives and as per the
ever increasing financing gap of $384 billion at 2005 prices and $475
billion at current prices (as per EGOM estimates, India Infrastructure
Report 2008, IDFC, 3i network) the issue has been super-sized.
Unfortunately SEBI has still not uploaded any revised prospectus/offer
document since the last one was filed for an issue half the size in
December 2007. Since then, while India’s Oil subsidy bill has soared to
over INR 100000 crores for both 2008 and 2009, OIL has managed its
exploration and distribution activity safely to become profitable and is
looking to fund the completion of its exploration projects through this
issue.

OIL will be critical to the FTSE India Infrastructure 30 index introduced in 2007 and

ETFs around the same will be in high demand once the listing of these shares is
completed as Institutional appetite for Indian public sector
infrastructure stories will continue to be robust for the more than $10
billion to be raised in the six months since July 2009 and another $20
billion that may be raised in 2010.

With Oil prices currently ruling at $70-75 and OPEC targeting an increase to
$100, we are back in an inflationary situation where exporting 20% of
our domestic reequirment though cash accretive is still not enough to
bring down our costs, while increasing our domestic production remains
slow and torturous. OIL remains immune to the imbalance however and will
be free to purchase and sell at market prices using more efficient
trading mechanisms than currently practiced by the consequent coalitions
and thus its financials are likely to be strong. However, they are
unlikely to be on par with a private sector Cairn Energy or Reliance in
terms of these efficiencies. OIL does share the subsidy bill as
under recovery, but it is still likely that because of it being a new
corporate, itwill suffer only minor losses on the said account and IOC
and HPCL wil maintain primacy with regards to paying the bills

The LNG/LPG situation however in the market
today can be easily capitalized by OIL, where neither $4.20 or $2.34 is
a fair price, global markets ruling currently at $3.45 ( mid-August
2009) It has reserves of 77 billion cu. mtrs of Gas including
contingency reserves primarily in the Rajasthan basin

Also, it had initially suffered losses in
production in the Dikom fields with 2007 production being 2.23 million
barrels, less than half of its 1999 production. Still, in the face of
global competition it has secured 21 of the 46 fields awarded by the
government till date under NELP. The Rajasthan fields that it operates
under PSC cover nearly 4000 sq. kms. They are a first step in
diversification of OIL’s over dependence on Asssam and the single 1220
km pipeline from the terrorist infested areas there in. Of its last =
known turnover of $1.2 billion, costs include 20% royalties for crude =
oil and 10% royalties for natural gas and offshore oil, and =
underrecovery from crude supplied to public sector refineries which is =
80% of the company’s revenue. they also pay approx 5% of this revenue to =
the Assam government in taxes on oil bearing land. Apart from owning the =
pipeline from Assam ( 44 million barrels in 2007) it also owns 26% =
in NRL and 10% in BCPL refineries. the current Capex includes =
exploratory wells and 2D and 3D seismic data acquisition in the fields =
being developed of the 38000 sq kms awarded to OIL till date ( 75% thru =
NELP )

[Tags India, India Infrastructure, IPOs, =
OIL, ETF, EEM, Emerging Markets, Russia, China, =
Energy]

[Category India, India =
Infrastructure]

Updates: In related business, NHPC allotment looks fair and square and pretty upbeat for the market, with not much of the 99 crore institutional market likely to be flogged for three years and IPO financing has picked up with the usual suspects of Tata Finance, JM, Kotak (Infina), Karvy and Anand Rathi. NHPC price per app was 250/- and gray market premiums would continue in OIL

OIL is a veritable cash cow earning 2000 crores in operating profits every year of which 940 crores ($200 million out of $450 million operating profits) is in trading income ( other income) OIL produced 25 million barrels of Crude and 7-8 million MTs of Gas. Currently, the pricing issue is slated for an Oct 20 hearing ( designed as the final hearing) and that may be key to OIL profits in the coming decade. Also 70 Oil blocks and 8 CBM blocks are currently open for bidding in NELP VIII
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