The Banking and Strategy Initiative

Chillin' out till it needs to be funded

OIL: Exploration and Distribution

India’s energy situation in short is that it needs four times more oil than it produces, and thus domestic production has been a focus in India’s Infrastructure story since 2005

The OIL IPO band at Rs 950-1050 just ensures an IPO size of Rs 5000 Crores ($1.02 billion) from 11% new shares and 10% sale of existing stakes of the Government, thus bringing the post issue government stake to 78%, very close to the ideal target of 75% promoter stake for listed companies and allowing the government to take down further ownership at a later stage based on market determined prices. The government will further sell another 10% of its stake to IOC (5%), BPCL and HPCL. The IPO monies would thus finance the company’s Capex requirement for the next 2 years across its exploration contracts in Assam, Rajasthan ( new fields in management contract with Cairn – the first Production Sharing Contract) and even its overseas bids in Libya and Venezuela, not the ones in Nigeria.

OIL is the newest entrant in India’s energy story, following on the footsteps of ONGC Videsh and ONGC while it has purportedly on paper, more market friendly organization values and has reserves of $500 billion in the new NEPC VI fields. However, It has relinquished interest in North Cachar and other Assam fields award in 2004.

In keeping with India’s Infrastructure story’s imperatives and as per the ever increasing financing gap of $384 billion at 2005 prices and $475 billion at current prices (as per EGOM estimates, India Infrastructure Report 2008, IDFC, 3i network) the issue has been super-sized. Unfortunately SEBI has still not uploaded any revised prospectus/offer document since the last one was filed for an issue half the size in December 2007. Since then, while India’s Oil subsidy bill has soared to over INR 100000 crores for both 2008 and 2009, OIL has managed its exploration and distribution activity safely to become profitable and is looking to fund the completion of its exploration projects through this issue.

OIL will be critical to the FTSE India Infrastructure 30 index introduced in 2007 and ETFs around the same will be in high demand once the listing of these shares is completed as Institutional appetite for Indian public sector infrastructure stories will continue to be robust for the more than $10 billion to be raised in the six months since July 2009 and another $20 billion that may be raised in 2010.

With Oil prices currently ruling at $70-75 and OPEC targeting an increase to $100, we are back in an inflationary situation where exporting 20% of our domestic reequirment though cash accretive is still not enough to bring down our costs, while increasing our domestic production remains slow and torturous. OIL remains immune to the imbalance however and will be free to purchase and sell at market prices using more efficient trading mechanisms than currently practiced by the consequent coalitions and thus its financials are likely to be strong. However, they are unlikely to be on par with a private sector Cairn Energy or Reliance in terms of these efficiencies. OIL does share the subsidy bill as under recovery, but it is still likely that because of it being a new corporate, itwill suffer only minor losses on the said account and IOC and HPCL wil maintain primacy with regards to paying the bills 🙂

The LNG/LPG situation however in the market today can be easily capitalized by OIL, where neither $4.20 or $2.34 is a fair price, global markets ruling currently at $3.45 ( mid-August 2009) It has reserves of 77 billion cu. mtrs of Gas including contingency reserves primarily in the Rajasthan basin

Also, it had initially suffered losses in production in the Dikom fields with 2007 production being 2.23 million barrels, less than half of its 1999 production. Still, in the face of global competition it has secured 21 of the 46 fields awarded by the government till date under NELP. The Rajasthan fields that it operates under PSC cover nearly 4000 sq. kms. They are a first step in diversification of OIL’s over dependence on Asssam and the single 1220 km pipeline from the terrorist infested areas there in. Of its last known turnover of $1.2 billion, costs include 20% royalties for crude oil and 10% royalties for natural gas and offshore oil, and underrecovery from crude supplied to public sector refineries which is 80% of the company’s revenue. they also pay approx 5% of this revenue to the Assam government in taxes on oil bearing land. Apart from owning the pipeline from Assam ( 44 million barrels in 2007) it also owns 26% in NRL and 10% in BCPL refineries. the current Capex includes exploratory wells and 2D and 3D seismic data acquisition in the fields being developed of the 38000 sq kms awarded to OIL till date ( 75% thru NELP )

[Tags India, India Infrastructure, IPOs, OIL, ETF, EEM, Emerging Markets, Russia, China, Energy]
[Category India, India Infrastructure]

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