With output slackening, Oil India looks at acquisitions for growth

Like the other state-owned oil firms, Oil India Ltd continues to bear the brunt of fuel subsidies. Despite a 3.9% growth in production volumes, the company’s revenues from sales fell by 10.3% in the March quarter. Its share of upstream fuel subsidies jumped 79% to Rs 2,873 crore. From $51.1 a barrel in January-March 2011, subsidy per barrel of oil increased to $80.8 this year. The sharp rise in discounted sales adversely impacted the company’s profitability. Net realizations during the quarter slumped 26.5% to $38.9 a barrel, which in turn led to a 20.9% drop in profits.

Looking ahead, two variables will play a determining role in the company’s fortunes. The first and foremost is the quantum of subsidies. During the last quarter upstream public sector firms shared 38% of the oil marketing companies’ (OMCs) under-recoveries. For the full year, Oil India’s share of OMCs under-recoveries rose 123% to Rs 7,351 crore. Analysts are not expecting the company’s share of subsidies to rise at the same pace this year. But, stretched government finances and lack of political support for diesel price de-regulation could continue to increase the subsidy bill.

The other important factor is the production volumes. Compared to Q4 2010-11, the company extracted 6.5% more gas in January-March this year. It is targeting to produce 2.92 billion cubic meters or 11% more gas this year. While gas volumes are growing at a healthy pace, crude oil production is slackening. Oil output in the last quarter grew by just 2.2% to 0.966 million metric tons. For the current fiscal the company is aiming to pump 3.95 million metric tons or a mere 1.7% more oil. Last fiscal oil production rose by 7.2%.

The company has limited head-room to increase oil output. To perk up volumes it is looking to buy oil & gas assets. TK Ananth Kumar, director-finance, Oil India says “The growth is restricted in that area, so we are looking at acquisitions.” It has set aside Rs 6,000-7,000 crore for acquisitions. With negligible debt and Rs 15,949 crore worth of current assets on its books, the company can easily fund a sizeable acquisition. But the question is will it be able to find a suitable match? It has been evaluating acquisition targets for some time now and was not able to close-in on any of them. It remains to be seen whether its current round of talks to acquire assets bears fruit.

Concerns about fuel subsidies and production volumes, meanwhile, are weighing on the stock performance. Oil India stock lost 2.6% of its value since the beginning of this year. The BSE Oil & Gas index has in the same period gained 0.8%.

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