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It's not Oil, its Cash

Oil India has a massive $45 billion committed to global acquisition. But does that make it a good investment?

Oil India (OIL) is the country's second largest oil exploration and production company. But OIL is not another ONGC. What separates OIL from its more famous big brother is its huge under-exploited reserve base, assets with low 'finding-and-development' costs and a cash rich balance sheet.

Oil India has 2P (proven and probable) reserves estimated at 944 million boe, which works out to around twice its 1P (proven) reserve. In contrast, the company's oil production for FY12 stood at 77 Kbopd. That extent of reserves therefore provides sufficient cushion to the topline and bottomline growth for many years. Not only that, Oil India's reserves have a high share of oil – 55 per cent in 1P and 62 per cent in 2P, which are high quality reserves.

Like ONGC, OIL suffers from the Government's ad hoc subsidy sharing formula. For instance, in the last quarter, the subsidy burden increased 146 per cent (y-o-y). For both these upstream companies, the outlook for FY13, at least, remains muted as far as lower subsidy sharing is concerned. With oil marketing companies (OMC) not quite ready to bear additional burden; it is more likely to come on to upstream companies like OIL. Last year for instance, the subsidy sharing ratio for upstream companies was close to 40 per cent. This year analysts are nervous that the ratio may come close to 50 per cent for upstream companies. Till the Government comes out with a clear subsidy sharing formula; both these companies could remain under the shadow of uncertainty.

Growth drivers
Oil India is following a two-fold growth strategy. On one hand it is aggressively scouting for more acquisitions to add to its existing reserve base and on the other it is directing efforts at its existing fields to increase output from them. The company is looking to invest around Rs 19,000 crore in the next five years to develop its existing reserves and hunt for international acquisitions.

Oil India has allocated massive $45 billion to acquire assets globally. It recently acquired 30 per cent stake in Houston-based shale gas company Carrizo. The deal was for a total consideration of $82.5 million of which $41.25 million was paid upfront in cash, with the remaining $41.25 million to be paid based on future drilling and development costs. OIL has a 20 per cent stake in this venture with IOC holding another 10 per cent. This deal gets OIL along with IOCL access to 60,000 net acres to develop shale gas. Both these companies will receive 30 per cent interest in Carrizo's existing production, of around 1,850 boe/day from Carrizo's 24 gross wells based in the US.

Oil India has around Rs 13,000 crore cash in its books. In an industry that relies heavily on acquisitions to build on its reserves, this is a huge asset for the company. This cash accounts for around 50 per cent of its market capitalisation. The stock trades at 0.23 times its 5-year PEG ratio. Even with the Government's interference, OIL has a lot of money-making assets that tilt the balance in its favour. Invest for the long-term.