State-run oil producer Oil India Ltd announced last week that it won two blocks in discovered small field (DSF) round-II bidding. Any excitement about this development is premature at this point. That’s because it will be a good 4-5 years for monetization to reflect in the numbers, said analysts, adding that the exact potential of volumes is not yet known.

Sure, the Oil India stock increased by 2% on Monday. However, it was also a day when broader markets were in a cheerful mood, with the National Stock Exchange’s Nifty 500 index closing 1.5% higher.

From a medium-to-long term perspective, the performance of Oil India shares has been on a slippery slope. The stock has underperformed the Nifty 500 index so far this year, declining by 18%.

Investors have feared that upstream companies, including Oil India and larger peer, Oil and Natural Gas Corp. (ONGC), will bear a portion of the subsidy burden. “Policy risks appear exaggerated for the E&Ps (exploration & production)," pointed out analysts from Jefferies India Pvt. Ltd, adding that ONGC and Oil India have not shared subsidies in the first nine months of fiscal year 2019, allowing them to post solid results.

Indeed, Oil India’s net profit for the nine months ended December increased as much as 55% over the same period last year to nearly 2,800 crore. During this time, crude price realizations increased by 34% year-on-year to $70.66 a barrel. Oil India’s financial performance was also helped by strong growth in other income.

On the flip side, production growth has been nothing to write home about. Crude oil production declined by almost 1% whereas gas production decreased by 3%.

It goes without saying that investors will do well to keep a close eye on the production trajectory.

Typically, higher oil prices help producers, but in India, higher oil prices lead to subsidy sharing fears. “Fuel subsidy risk on upstream PSUs (public sector undertakings) has declined significantly due to moderation in crude price, and reasonable fiscal year 2020 cooking fuel subsidy budgetary provision," said SBICAP Securities Ltd’s analysts in a report on 1 March.

The silver lining to this story is that the stock’s underperformance has meant valuations are not demanding. Oil India shares trade at six times estimated earnings for the next fiscal year, according to Bloomberg data. 

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