Oil India's Q2FY26 results disappointed, but downside may be limited too

OIL's oil and gas production was 13-14% lower than guidance in FY25, and recovery did not come in the first six months (H1) of FY26

Oil India’s (OIL’s) numbers for the July-September quarter (Q2) of FY26 were disappointing with weak volumes, high operating expenditure (opex) and high write offs for dry wells as well as downgraded guidance for future production.

 

Adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) were down 18 per cent year-on-year (Y-o-Y) due to low oil and gas volumes, low realisations and high opex.

 

Exploration write offs amounted to ₹980 crore. Revenues include one-off gains from crude-pumping revision and cuts in production guidance.

 

Adjusted for one-offs, revenues were down 6 per cent Y-o-Y. Standalone profit after tax (PAT) was also well below consensus and down 43 per cent. Oil production at 848,000 tonnes was down 3.1 per cent while gas production, up 3 per cent, was in line. 

The net oil realisation, at $65.8 per barrel (bbl), was down 7 per cent and well below ONGC’s while gas realisations, at $6.5 per million British thermal units (mmbtu), were flat and also about 7 per cent below ONGC’s $7.1/mmbtu.

 

OIL has not benefited from New Well Gas unlike ONGC and gas production was impaired by civic protests and disturbances. Total oil and gas production stood at 1.65 mmtoe (million metric tonnes of oil equivalent), down 1.3 per cent Y-o-Y and 1.7 per cent quarter-on-quarter (Q-o-Q).

 

OIL’s oil and gas production was 13-14 per cent lower than guidance in FY25 and recovery did not come in the first six months (H1) of FY26.

 

FY26 and FY27 production guidances have been cut by 4-5 per cent for oil. For gas, it is by 12 per cent for FY27. 

 

Working on mature fields pushes up opex and depreciation while the exploration is also expensive.

 

Analysts are cutting earnings estimates for FY26 and FY27.

 

Numaligarh Refinery (NRL) generated higher gross refining margins (GRMs) of $10-plus.

 

Throughput was affected by lower crude supply.

 

The realisations and valuations suggest that investors are betting on crude benchmark, the Brent price at $60-65, which reflects current international price trends.

 

Any bullish estimates will not only depend on better operational performance by OIL, but also on rising crude prices.  

 

Optimists suggest OIL may see earnings per share (EPS) growth in mid-teens if it can meet guidance for 20-25 per cent output growth in the next 3 years

 

They feel the commissioning of the Indradhanush gas pipeline will improve transport income, and lead to 200 per cent expansion of NRL capacity to 9 mtpa (million tonnes per annum) from 3 mtpa.

 

Value investors may also be attracted by steady dividend payouts

 

There are buy recommendations betting on gas production growth at 9 per cent compound annual growth rate (CAGR) through FY27 and oil production growth at 4 per cent over FY25-27.

 

The production volume guidance for crude oil was 3.5 mtpa for FY26, 3.75 mtpa for FY27, and 4 mtpa for FY28.

 

Gas is at 3.6 billion cubic metres (bcm) for FY26, 3.8 bcm for FY27 and 4.6 bcm for FY28. The output guidance has been revised below oil to 3.75 mt (from 3.9 mt) in FY27 and gas output to 3.8 bcm (from 4.3 bcm) by FY27.

 

Even these revised targets may be considered aggressive and optimistic though there’s been reductions in guidance.

 

The capex guidance is ₹7,000 crore for FY26 for standalone OIL but management suggests this may be exceeded.

 

NRL refinery is expected to sustain strong gross refining margins (GRMs) and may register above 100 per cent utilisation in Q3FY26,

 

Expansion is to be commissioned by December-end, though meaningful volumes may only materialise from Q2FY27. OIL also is working to recover $300 million stuck in Russian banks due to US sanctions. The Duliajan Numaligarh Pipeline has been completed with capacity expanded from 1mmscmd to 2.5 mmscmd.

 

Analysts are likely to cut EPS estimates for FY26 and FY27 but valuations are not high, especially given a dividend cushion of 3-5 per cent. The OIL stake in Indian Oil may see a valuation upgrade which could push up sum-of-the-parts valuations. If a meaningful percentage of gas output is reclassified as new well gas (NWG), it would also boost realisations.

 

The stock market response to results and guidance was muted with the stock losing 0.5 per cent.