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Analysts feel that the benefits of gas price hikes are currently not even being factored into the stock prices of upstream companies as OIL India. Thus the price targets of analyst for OIL India remain generally in Rs 575- Rs 600 range, which means an upside of 19-24% from current stock prices of Rs 481.
Volume concerns
The recent disruption in oil and gas production in Assam due to a strike call by All Assam Students Union since March 1 for a few days raised concerns. By 6th of March, Oil India's average crude production had dropped to 5,000 tonne from 9,000 tonne, as gas production halved to 3.5 scm leading to a estimated loss of Rs 20 crore a day as per ICICI securities estimates. Though the issue has been sorted out, clarity is being awaited on how much loss Oil India may have suffered. However, such repeated disruptions are a cause of concern. These aggravate risks to volume expectations.
Analysts at Kotak Institutional equities believe that intermittent disruption of development and production activities due to strikes and blockades in Assam will not only lead to lower volumes for OIL during the period of disruption, but may also put at risk assumptions of modest growth in volumes over the medium term.
The company already has reported a 3-5% decline in crude production over the past several quarters due to disruptions and declines from mature fields. Analysts at Antique observe that if the current depressed production level persists for 15 days, FY14 oil & gas production would fall to 3.56mmt/2.6bcm (million Metric Tonne/billion cubic feet) from current estimate of 3.63mmt/ 2.65bcm, with an EPS impact of Rs 1.4 per share, or 2.5%. In the absence of the disruptions, however, the company can easily achieve 3.9-4.0 MTPA crude production.
Subsidy Risks
The government's tight fiscal position has increased fears that upstream oil companies may have to bear significantly higher subsidy in FY14 (around 45-50% of total under recoveries of Rs 65,000-70,000 crore as per Ambit capital estimates). However, it is ONGC which bears more than 80% of the same. The lack of clarity with regards to gas price for power and fertilizer sector aggravates uncertainty further on upstream companies' contributions as APM gas prices double. Analysts believe that clarity on the same will emerge in next 3-4 months.
Diesel price hikes bring respite
Nevertheless the diesel price hikes being undertaken regularly are leading to a respite. The under recoveries estimates show a regular decline from Rs 1,32,900 crore in FY14 to Rs 1,06,800 crore and Rs 84,300 crore in FY15 & FY16 respectively as per Ambit estimates. Thus in spite of upstream share increasing from 48% in FY14 to 57% each in FY15 and FY16 respectively, OIL India subsidy burden is declining from Rs 63,800 crore in FY14 to Rs 60,900 crore in FY15 and Rs 48,000 crore in FY17. Ambit analysts feel that Oil India share prices are factoring in perpetual net crude realisation at around 20 per barrel lower than average and gas price of only $4.2-4.5/mmbtu.
Gas price hikes to accrue benefits
With the gas prices likely to be hiked from April 14 analysts remain positive on OIL and gas upstream companies. Analysts at Antique observe that for every $1/mmbtu hike in gas prices, OIL's EPS of Oil India is estimated to raise Rs 4.8 per share. Chirag Dhaifule at LKP securities estimates that a $1/mmbtu increase in gas price would lead to 8% and 7.8% increase in OIL India's earnings in FY15 and FY16 respectively. Analysts at Ambit even after adjusting gas subsidy burden of $3.0 per mmbtu still see OIL India's net realisations increasing from 4.2 per mmbtu in FY14 to $5.00 per mmbtu in FY15 and FY16 each. Dhaifule, however, sees gas realisations at $6 per mmbtu only which is further positive .
In the backdrop while analysts at Ambit based on net crude realisation of $51-53/bbl and gas price of US$5.0/mmbtu in FY15 and 16 have increased their price target to Rs596 (from Rs585) for Oil India, analyst at Antique have a target price of Rs 600.
The company is also likely to benefit from current upgrade in Mozambique reserves from 35-65 tcf to 45-70 tcf too. The company had acquired Videocon's stake in the fields along with ONGC. Dhaifule adds that OIL's debt free balance sheet, estimated cash balance of Rs 73 bn in FY14e and estimated free cash flow of Rs 1,480 crore over FY14-16e period enables the company to opt for both organic and inorganic growth
