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Oil India IPO: First cut
Sep 7, 2009

The initial public offering of Oil India opens today. The company is the second largest national oil and gas company in India after ONGC as measured by total proved plus probable (2P) oil and natural gas reserves and production. Following is our summary analysis of IPO. We will put up a detailed analysis shortly Reasons to apply

Existing high quality reserves: Upstream oil and gas is a risky business and there is no certainty that exploration activities will result in discoveries. Hence, existing reserves provide a degree of certainty for the investor. As of March 31, 2009, the company’s proved plus probable (2P) crude oil reserves were around 575 m barrels and 2P natural gas reserves were around 63 bn cubic meters. Most of the company’s oil and gas reserves are located onshore in the Upper Assam basin in Assam and Arunachal Pradesh.

Low finding and lifting costs: Oil India’s reserves are located onshore and it has infrastructure it has installed over decades. As a result, it has low finding and lifting costs when compared to new players who have to explore in extremely difficult terrains. Moreover, it benefits from low interest expense and relatively high use of in-house services in place of more expensive third-party contractors.

Reasons not to apply

Valuations not attractive: Instead of applying for Oil India’s IPO, the investors have the choice of buying the shares of its peer ONGC from the secondary market. Hence, we must compare their relative valuations. On comparing Oil India with ONGC, it becomes clear that the issue is not really cheap at around Rs 1,943 m per million tonne of oil equivalent (MTOE) as compared to ONGC’s Rs 1,874 m per MTOE. As such, we believe the Oil India IPO does not offer any margin of safety in terms of valuations at the upper end of the offer price.

Not aggressive in acquiring exploration area: Oil India has not been as aggressive in obtaining exploration area as its other upstream counterparts. It has pursued a selective bidding strategy in the past seven rounds of NELP auctions in India and intends to continue doing so in the future rounds. As a result, increase in Oil India’s reserves might grow at a slower rate as compared to other upstream companies in the future.

Conclusion
Oil India has in place reserves with low operating costs. However, the company is not as aggressive as its peers in acquiring exploration licences due to which its growth prospects are comparatively weaker. On comparing Oil India with its peer ONGC, it becomes clear that the issue is not really cheap at around Rs 1,943 m per million tonne of oil equivalent (MTOE) as compared to ONGC’s Rs 1,874 m per MTOE. We believe the Oil India IPO does not offer any margin of safety in terms of valuations at the upper end of the offer price and hence is not attractive. As such, we recommend you to ‘Avoid’ the IPO.

The detailed report will follow shortly…

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