Higher crude oil output can add new triggers for Oil India

Improving realisations and refining margins enhance earnings visibility

Oil India, which had remained a laggard till early July, has significantly outperformed its larger upstream peer ONGC, as well as broader indices. While Oil India has gained 34 per cent in the past three months, ONGC was up about 10 per cent and the Sensex by around two per cent.

Oil India’s under-performance in the past can be attributed to the downtrend in crude oil prices, muted production growth, and the overhang of a royalty payout to the Assam government. Even the anticipated gas price hike in March not coming through added some disappointment. Looking at the stagnant crude oil production trend of Oil India, realisations remain crucial for growth and profitability. So, it’s not surprising that the decline in crude oil prices from about $58 levels in January to $42 in June led to pressure on the stock price. But, with crude oil prices rebounding to over $50 now, investor sentiment has also got a boost.

The overhang of subsidy payout, too, has subsided with the central government’s decision to pay the dues of both ONGC and Oil India to the respective state governments of Gujarat and Assam. 

The other good news has been the 17 per cent upward revision in gas prices by the government to $2.89/mmbtu for the October 2017–March 2018 period. India Ratings says the public sector units, Oil India and ONGC, which contribute around 80 per cent to the total domestic production, would be the largest beneficiaries of the price increase. It believes this would result in around Rs 1,300 crore in higher revenue for Indian domestic producers during the second half of FY18. 

Though Oil India may not have seen an uptick in oil production in the past few years, its per day gas production has been rising regularly by 3.5-4 per cent since FY14. India Ratings’ October 6 data shows Oil India’s gas and crude production volumes have grown seven per cent and six per cent, compared to ONGC’s two per cent and six per cent increase, respectively, which again is encouraging. But, sustenance of Oil India’s crude oil production trend remains crucial as most analysts have not been anticipating much respite in FY18. ONGC is expected to see much better gas production growth, while it has arrested the declining trend in its crude oil production. It is the HPCL acquisition overhang, which has been weighing on sentiment towards ONGC.

The improving profitability of the Numaligarh (Assam) refinery is also looked at in a positive light. The refinery’s profitability could get a boost because of improving refining margins in the September quarter. Probal Sen at IDFC Securities sees a sharp increase in the profitability of the Numaligarh refinery supporting Oil India’s consolidated earnings over FY18-19. 

Overall, both better realisations and improved refining margins are positive for Oil India’s earnings and any uptick in crude production will be a major trigger.