The upstream oil and gas (O&G) sector has delivered a stellar performance in the stock market in the recent past.
The O&G sector is dominated by PSUs and despite the imposition of a windfall tax, profitability has been impressive.
Oil India Limited (OIL) is particularly favoured by investors.
The PSU has delivered steady results in the October- December quarter of Q3 FY24, and it is looking to ramp up production in both oil and gas.
OIL’s subsidiary, Numaligarh Refinery (NRL), where it owns a 69.6 per cent stake (the rest is owned by the Assam Government and Engineers India), is delivering good results as well as seeing positive future developments.
The volume growth scenario remains crucial for OIL’s future valuations. The commissioning of new capacity at NRL is scheduled for September 2025, and this could be a growth driver.
Eventually, NRL will go from a capacity of 3 MMTPA (million metric tonnes per annum) to 9 MMTPA.
NRL, assuming current utilisation rates are maintained, should generate approximately Rs 2,000 crore per annum in profit after tax (PAT) in FY24.
Hence, NRL may achieve PAT run-rates of Rs 4,500 crore at conservative estimates after the new capacity is online.
This would boost OIL’s bottom lines and valuations.
There is also the chance that NRL will launch an IPO within FY26, which could lead to valuation unlocking.
Downstream, the Indradhanush Gas Grid (IGGL) startup will launch in April 2024, which could also drive volumes.
One concern for OIL has been low free float given the large government stake and cross-shareholdings with other PSUs.
There have also been delays in the commissioning of NRL’s new capacity and questions about the marketing ability to place refined products.
However, NRL gives OIL exposure to the refining upcycle and the company is confident about O&G volume growth, from onshore acreage.
OIL produced 6.4 MMTOE (million metric tonnes of oil equivalent) of oil and gas combined in FY23 (3.18MMT of oil and 3.2 MMT of gas), and it is guiding for 6.7 MMTOE in FY24 (3.4 MMT oil, 3.34 gas) and 7.2 MMTOE (3.53 MMT oil, 3.67 gas) in FY25 and 7.9 MMTOE (3.68 MMT oil, 4.22 gas) in FY26.
It is looking at a steady realisation of $73 per barrel or equivalent through FY24 and FY25.
Management reiterated an ambitious plan of accelerated drilling (50/75+ wells in FY24/FY25).
Gas volumes will be ramped up as pipelines connect to fields, guaranteeing more offtake.
Barauni Guwahati pipeline is almost ready, while IGGL (NE grid) Phase 1 from Guwahati to Numaligarh should also be commissioned in CY24.
The NRL performance is better, with operating leverage from high utilisation, and stable debt on the balance sheet, which means it could see valuation upgrades.
Product offtake from expanded capacity would be led by BPCL while there are prospects of Bangladesh exports.
Analysts are seeing a sharp rise in Fair Value as there is visibility on expansion prospects. The stock was up by over 25 per cent over the past month.
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