Recommendation From Oil Drilling And Exploration Sector

HERE IS WHY

Increasing crude oil prices giving momentum 
to growth.
Attractive valuations.
Diversified product range.

The annual oil production in India has grown at a CAGR of one per cent in the last eight years ending with FY16. At the same time, the annual gas production increased at CAGR of 2 per cent. The crude oil price has moved significantly and almost doubled to USD 52.52 from its all-time low of USD 27. The increase in crude oil price has given a boost to upstream oil companies.

The Organisation of Petroleum Exporting Countries' (OPEC's) members and other producers of crude oil are trying to arrest the decline in crude oil prices by cutting down their production. Overall, they have cut the production by about 1.8 million barrels per day. Saudi Arabia alone has cut the oil production by more than 4.86 lakh barrels per day.

Kuwait has cut its oil exports by more than 1.33 lakh barrels per day. In view of the positive sentiments across the sector, companies such as Oil India are likely to benefit the most in the near term.Oil India is engaged in providing crude oil, natural gas, LPG, pipeline transportation and other related businesses. It owns and operates approximately 10 drilling rigs and over 10 work-over rigs, besides hiring on charter drilling rigs based on operational requirement.

On January 12, Oil India declared bonus for its shareholders in the ratio of 1:3, i.e. 1 bonus equity share of Rs.10 each for every 3 existing fully paid-up equity share of Rs.10 each. On the financial front, Oil India’s revenue decreased 7.9 per cent to Rs.2331 crore in Q2FY17 as compared to the same period in previous financial year. The company’s EBITDA declined 9.02 per cent to Rs.837 crore in Q2FY17 on a yearly basis. Its net profit dropped 17.77 per cent to Rs.580 crore in Q2FY17 as compared to the same period in the previous fiscal.

Oil India’s net crude oil price realisation stood at USD 44.55 per barrel in Q2FY17 with a growth of 3.39 per cent on a yearly basis. The company’s net crude oil price realisation has increased 15.66 per cent to USD 43.83 per barrel in H1FY17, as compared to the same period in the previous financial year. On segmental revenue front, Oil India has earned 70.46 per cent from crude oil, 23.35 per cent from natural gas, 3.67 per cent from transportation, 1.31 per cent from LPG, 1.21 per cent from others in FY16. Oil India’s debt to equity ratio stood at 0.45x in FY16. The company’s ROE and ROCE stood at 8.24 per cent and 10.57 per cent, respectively, in FY16. 

Its interest coverage ratio remained at 9.14x in FY16. On the valuation front, the share price of Oil India is trading at a trailing 12-month PE multiple of 13.93x as against ONGC’s 18.1x and industry PE of 17.56x. The company’s PB is at 1.23x as against ONGC’s 1.37x. It has given attractive dividend yield of 3.45 per cent to its shareholders. Oil India’s book value stood at Rs.283.74.