Home >Markets >Mark To Market >Oil India’s valuations have appeal, but outlook is slippery after a dull Q1FY21

Shares of Oil India Ltd are about 39% lower from their pre-covid highs of January on the NSE. True, valuations are attractive. Although from a near-to-medium term perspective, muted Q1 results, weak oil price outlook and subdued production expectations are likely to keep meaningful upsides in the share price at bay.

“Our reverse valuation exercise suggests that the stock is already discounting dated Brent crude price recovering to about $50 per barrel, providing limited leverage to any improvement from current levels," wrote analysts from Kotak Institutional Equities in a report on 23 August. This is based on Oil India’s closing price on Friday before it announced its Q1 results.

On Monday, the stock declined by 2.5% when the Nifty 50 index was up 0.83%.

For the June quarter, the state-run oil and gas producer saw 48% year-on-year drop in revenue, mirroring the sharp drop in crude oil prices. The company’s realizations from oil declined 54% y-o-y and nearly 42% sequentially. The company said natural gas price realization for the June quarter fell to $2.39 per million British thermal units (mmBtu) from $3.23 per mmBtu in the previous quarter. Year-on-year, crude and gas sales declined 8% and 6%, respectively.

Overall, earnings before interest, tax, depreciation and amortization fell a sharp 85% to 197 crore.

For some, Oil India’s high cost structure is a concern. Kotak’s analysts said, “We remain wary of Oil India’s elevated cost structure, which does not bode well in a lower oil and gas price environment. Blended production and operating costs excluding statutory levies have increased to $13.4 per barrel in FY2020 from around $10 per barrel in FY2016-18. Standalone capex per barrel remained elevated at around $9-10 over the past few years compared to DD&A and exploratory write-offs of $5-8 a barrel, but it hasn’t resulted in any improvement in its reserves trajectory."

DD&A stands for depreciation, depletion and amortization costs.

As mentioned earlier, valuations of the Oil India stock are not demanding, but that may not be enough to excite investors. Based on Bloomberg data, the company’s shares trade at about five times estimated earnings for financial year 2022. “Low oil prices remain a primary concern that could keep earnings recovery in check. A further cut in APM gas prices (from October) could put added pressure on earnings. Upstream companies need much higher oil prices to revive capex," point out analysts from BOB Capital Markets Ltd in a report on 22 August. APM is short for administered pricing mechanism. Further, the outlook on Oil India’s production growth remains tepid.

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