Stock Pick From The Oil & Gas Industry

Low Priced Scrip is a hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a leading Maharatna PSU company in the steel sector.

HERE IS WHY:

• Done with its capex cycle; its free cash flow will help deleverage its balance sheet

• Refining margins above average, ensure efficiency and profitability

• Large reserves will help cater to potential demand and sustain performance 

Consistent losses, admission to the CDR cell and heavy tax liabilities were a part of the world that Essar Oil was living in. It now stands holding its head high with ramped up operations, top notch margins, healthier finances and an exit from CDR. The current position of the company ensures minimal downside risk combined with a huge growth potential for the future, making it a must-add to your portfolio. Essar Oil has a strong presence in the hydrocarbon value chain with operations spread across upstream (exploration and production), midstream (refining) and downstream (marketing) activities. 

Exploration and Production: Essar Oil has the largest acerage of coal bed methane (CBM) blocks in India. At its first CBM project- Raniganj, West Bengal - the current production stands at 55000 scmd (standard cubic meters per day) through 120 drilled wells. On the receipt of clearances, this site has a potential production capacity of three million scmd. Apart from this, the business currently has an approximate 1.7 billion barrels of oil equivalent of reserves and resources spread across eight oil and gas blocks, providing a huge potential for the future. 

Refinery Operations: Essar Oil has a 20 MMTPA (million metric tonnes per annum) complex refinery at Vadinar, Gujarat. This refinery has recently completed its first phase of expansion and has also managed to gain tremendous efficiency. High refining margins are achievable when the lowest price is paid for crude oil and the highest price is achieved for refined products. 

The company has managed to pull this off to such an extent that the proportion of ultra-heavy crude has increased from 24 per cent in Q3FY12 to 67 per cent in Q3FY13. At the same time, the proportion of light and middle distillates in the refined product portfolio increased from 69 per cent in Q3FY12 to 85 per cent in Q3FY13. This has resulted in its Gross Refining Margin to touch USD 9.75/bbl. The margin is comparable to Reliance Industries which clocks around USD 9.6/bbl. The end result of is visible in the financial performance of the company. Essar Oil posted a profit of Rs 32 crore in Q3FY13 against a loss of Rs 362 crore last year. 

Retail Business: On the retail front, Essar Oil exports 39 per cent of its products. Domestic sales are distributed over PSUs (52 per cent), Bulk (7 per cent) and Retail (1 per cent). The company’s prospects improve considering the fact that the company manufactures Euro IV and V grade norm products that have growing penetration in India. At the same time, providing support to profitability is the deregulation of petrol and diesel prices. 

The debt level of Essar Oil is so high that the interest costs amounted to 83 per cent of the EBITDA. This certainly needs to be curbed. With its capex cycle complete, margins expanded and a market to cater, Essar Oil will see free cash flows being generated which will be used to deleverage the balance sheet. 

Moreover, it has received RBI’s nod to raise up to USD 2.2 billion through External Commercial Borrowings (ECB), in order to partially cover its USD 2.8 billion debt, putting it in a much better position. It could certainly touch its targeted Rs 100000 crore revenue for the next year. All these reasons put together make Essar Oil a very strong contender to outshine in the near future. We recommend investors to buy Essar Oil stock with a target price of Rs 125 per share, achievable by the end of FY14.