Oil India Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Record 9M profit, production-led: Consolidated PAT jumped 88% on higher crude and gas output plus better pricing, while standalone Q3 PAT hit an all-time high.
• Overseas assets are the soft spot: Share of JV profits turned negative as Nigerian and Russian assets underperformed on production and costs, a drag management flagged candidly.
• Infrastructure unlocks the gas story: Gas output is capped not by the reservoir but by pipeline capacity; the IGGL grid and Arunachal-Assam line are the gating events for the 5 BCM ambition.
• NRL expansion on track, SAED a margin wildcard: GRM nearly doubled YoY for 9M, but the special excise duty on diesel wiped out Q3 EBITDA gains from higher throughput. Expansion completion is slated for FY25.
• What to watch next quarter: Whether dividend repatriation from Russia/Singapore materializes in March, the pace of pipeline transportation contract signings, and any government move on the Kirit Parikh gas pricing recommendations.

Production & Volume Trajectory

• Crude oil: Q3 production rose over 7% YoY, with 9M up over 5%. Management is on track for the FY23 target of 3.2 MMT and has set FY24 at 3.4 MMT, with the FY25 ambition of 4 MMT (0.4 crore tons) reiterated with confidence.
• Natural gas: Q3 output was up ~2% YoY and 9M up ~4%, but Q3 saw a seasonal dip because tea garden customers in Assam and Arunachal Pradesh do not lift gas during this period, forcing production cuts. Management described this as a normal annual cycle.
• Growth engine: Accelerated drilling under Mission 4 Plus is underway across five identified old fields: Baghjan, Balimara, Lakwa, Gaon Kumchai, and one in Rajasthan. 70 development wells are planned for FY24.
• Reserve replacement: Reserve accretion has consistently exceeded one over the years, supporting the production ramp-up.

Pankaj Kumar Goswami: "And by '25, definitely, we'll be able to reach 0.4 crore."

Gas Infrastructure: The Bottleneck & the Breakout

• The constraint is above ground, not below: Management stated plainly that fields are capable of producing more gas but output is held back by infrastructure. Once pipelines are in place, adding production is straightforward: projects are already in place, just drill the well and gas comes up, flowing into the natural course of business rather than requiring a separate project.
• IGGL grid: Progress is running ahead of targets, with completion expected by end-2023 or early 2024. Management expects the Northeast gas business to boom once the grid is operational, reaching full-fledged scale about a year after that. Some line connection with the GAIL network is expected roughly 12 months from now.
• Arunachal-Assam pipeline: One line under construction, slated for completion by end-2024. The distance is only 53 km but the route runs entirely through forest with tough river crossings and dense population, requiring extensive permissions. Once built, it will enable gas produced in Arunachal Pradesh to reach Assam.
• 5 BCM ambition: Management has set an ambitious gas production target of 5 BCM, contingent entirely on these infrastructure pieces falling into place.

Pankaj Kumar Goswami: "I cannot produce gas unless and until I have these infrastructures. Though the fields are capable, but we are not being able to produce because of these infrastructure issues."

Overseas Assets: The Drag

• JV profit swing: Share of profits from associates and joint ventures turned negative in Q3, driven by underperformance in two specific overseas assets: the Suntera asset in Nigeria and the License 61 asset in Russia. Both are producing below expectations with higher operating expenditures, and the Russian asset was also hit by Ruble depreciation against the USD. Main Russian assets are performing normally.
• Dividend repatriation awaited: Board meetings for the Russian and Singapore entities are expected in the first week of March. Once partners decide, management expects some dividend inflow within the next month.

Sanjay Choudhuri: "Actually, what has happened, you see in some of the assets that we have acquired overseas have not been able to perform as per our expectations when we acquired them... these two-three assets have not been able to perform as per expectations. They're like -- and this has not been the bright stars in our basket."

NRL: Refining Tailwinds & the SAED Headwind

• 9M performance strong: NRL's 9M PAT rose to INR 2,933 crores from INR 2,429 crores, with GRM nearly doubling to \$19.71/bbl from \$10.40/bbl. Throughput increased from 61.4 to ~80 crore tons.
• Q3 margin paradox: Despite throughput rising and GRM improving from \$12.50 to \$13.50/bbl, Q3 EBITDA was flat to marginally down. The culprit was the Special Additional Excise Duty (SAED) on diesel products, which sits below the gross refining margin line and erased the operational gains.
• GRM normalization: NRL's GRM fell sequentially from 32.39 in Q1 to 13.84 in Q2 and 13.48 in Q3, tracking the global Singapore GRM which spiked in Q1 and has since returned to normal levels.
• Expansion on track: The three-fold capacity expansion is slated for completion by FY25, with progress running as per plan and full confidence of operational readiness by 2025. Management expects margins and profitability to rise in the same ratio as production capacity, and an indication has been received that excise benefits will apply to the expanded capacity as well.
• Dividend outlook: NRL has paid two dividends totaling INR 760 crores so far this fiscal, booked in Q2. A dip in NRL dividend is possible due to expansion capex, but management expects better dividends from IOC in the forthcoming year, keeping the overall dividend range from these companies broadly maintained.

Financial Mechanics & Below-the-Line Items

• Other expenses swung sharply QoQ: Other operating expenses fell from INR 531 crores in Q2 to INR 113 crores in Q3, driven by fewer well write-offs and non-linear CSR expenditure. The broader "other expenses" head, which also captures forex and CSR, saw forex losses shrink from INR 290 crores in Q2 to INR 49 crores in Q3.
• Provision write-back: A provision made last year on an estimated basis was reversed because the actual payment came out lower, providing a one-time add-back.
• Well write-offs are unpredictable: When asked for Q4 guidance, management flatly declined, calling it "an impossible task" and "gazing at a crystal ball."
• Pipeline transportation income depressed: Earnings from pipeline transportation are low because contracts with refineries are still under negotiation on a cost-plus basis, following heavy investment in pipeline expansion and modernization. New rates for reverse pumping have already been applied prospectively. Management said negotiations are on the verge of signing and income will show a considerable change once contracts are in place.
• SAED mechanism for upstream: Upstream net realization has been range-bound around \$70–75/bbl, moderated fortnightly by SAED adjustments. Management characterized this as a fair deal for a country 80% dependent on oil imports, with part of high prices passed to consumers.

Sanjay Choudhuri: "That would be an impossible task. Nobody will be able to give it to you. I would be gazing at a crystal ball if I do that."

Capital Allocation & Shareholder Returns

• Dividend: The board declared a 100% second interim dividend of INR 10 per share, taking the total interim dividend for FY23 to INR 14.5 per share. Management expects to meet the DIPAM guideline of 30% payout and to pay in excess of it, following historical practices, but declined to confirm a specific 50% payout ratio when pressed.
• Debt: Debt taken for the acquisition of additional shares in NRL has been fully repaid.
• Capex outlook: Standalone capex is expected to sustain at a run rate of INR 3,000–4,000 crores for the next few years, with an additional INR 500–600 crores in equity contribution to NRL's capex.
• Crude oil auction: Plans are in place to begin the auction process in FY24, with groundwork already underway.
• Baghjan: The field is fully operative and much of current gas production comes from that area. A provision of INR 449 crores has been made and management believes that is sufficient. An additional assessment of INR 1,200 crores has been rejected: it appears neither as a provision nor as a contingent liability in the financial statements. Management stated that after two years of bioremediation work, flora and fauna have returned to their original state.

Sanjay Choudhuri: "If we would be accepting it, it would be a provision or contingent liability, right? It is neither a provision, nor a contingent liability. So, obviously, we're not accepting is evident from our financial statements."

Guidance & Commitments

Key Metrics