Oil India Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Operating strength buried under a one-time provision: EBITDA margin expanded to 48.29% in Q2 and crude production grew 5.7% YoY, but a Rs.2,656 Cr provision for disputed royalty taxes wiped out reported profit.
• The provision is a recurring drag, not a one-off: Management will now book ~Rs.500 Cr annually against this disputed service tax and GST on royalty, a liability previously held only as a contingent disclosure.
• Production growth is real but gas remains hostage to customers: Crude output is tracking toward 3.5 MMT this year with a 4-5% annual growth ambition, while natural gas suffered Q1 customer shutdowns and is only now recovering.
• Russian assets are the quiet outperformer: The Taas field is producing above its originally estimated peak, and no additional equity calls are expected from either Russian asset.
• What to watch next quarter: Whether the Guwahati High Court merit hearing on the disputed royalty demand gets a date, the pace of Numaligarh refinery capex drawdown, and any clarity on Venezuela activity restart.

The Royalty Provision: What Happened and What It Means

• The charge: A Rs.2,656 Cr exceptional provision was taken in Q2 for disputed service tax and GST on royalty, previously carried as a contingent liability. The largest chunk of the dispute sits with the Guwahati High Court.
• Why now: The merit hearing at the Guwahati High Court was deferred and management no longer knows when it will happen, so it decided to provide for the liability rather than keep accumulating it off the balance sheet.
• The ongoing cost: This is not a clean-up. Management will continue to take a provision quarter-on-quarter going forward, annualizing to roughly Rs.500 Cr depending on crude price movement.
• Dividend impact acknowledged: Management admitted that without the Rs.2,600 Cr provision, the dividend would have been higher, but framed the provision as a prudent decision for the company's future given the liability size.

Harish Madhav: "if we have not accounted for 2600 possibly we would have given a high dividend no doubt about it but as a prudence for the future of the company also looking into the huge liability we see it is a very fair decision on our part to provide for this liability and provision."

Production: Crude Rising, Gas Recovering

• Crude oil momentum: Production improved 5.7% YoY in Q2 and 5.48% in H1, driven by operational improvements. The FY2024 MOU target of 3.8 MMT is not feasible, but management is targeting at least 3.5 MMT by year-end.
• Natural gas drag: H1 gas production fell 2.45% YoY because BVFCL, Numaligarh and BPCL customers were all under shutdown in Q1. Q2 saw an 8.72% QoQ recovery, and full-year gas growth of 2-3% is still expected.
• Growth ambition: Internal target of 4-5% annual crude production growth over the next two to three years, though management declined to commit specific volumes for FY2025 or FY2026.
• Reserve replacement: Targeted to stay positive, above one. No new discoveries were made domestically or internationally in H1.

Harish Madhav: "efforts certainly are on our part to continue growth in crude oil production at least 4 to 5% annually over next two three years timeframe that is what internal target is there and hopefully we will be achieving that"

Russian Assets: Quietly Delivering

• Taas outperformance: The Taas asset is producing more than its originally estimated peak of ~0.5 crore tonnes per annum, performing better than acquisition estimates. Vankorneft is performing in line.
• No further equity calls: No additional contribution is expected from Oil India's side for either Russian asset.
• Pricing cap reality: Russian crude realizations are lower than international benchmarks because of the sale price cap, though net realization to Oil India after windfall tax has been around $75-76/bbl.

Harish Madhav: "Taas asset has performed better, they were expected to produce peak production of about 0.5 crore tonnes per annum but they are producing more than that."

Revenue and Margins: Price Headwind, Cost Discipline

• Revenue down on price, not volume: H1 turnover fell 10% because crude realization dropped to $82.22/bbl from $106.53/bbl in H1 FY2023. Production volumes actually grew.
• EBITDA margin expanded: EBITDA margin rose to 48.29% in Q2 and 50.52% in H1 despite the lower crude price, reflecting operating cost discipline.
• Other income boost: Strong dividend inflows from NRL (final dividend booked after AGM), IOCL (~Rs.290 Cr), and the Singapore subsidiary (~Rs.400+ Cr from pre-embargo funds) supported other income.
• Finance cost step-up: Finance cost rose from Rs.166 Cr to Rs.224 Cr QoQ, partly because Q1 included an exchange gain that lowered that quarter's base, and partly from benchmark rate increases. The expected run rate is ~Rs.200 Cr quarterly if rates hold.

Capex Pipeline: Numaligarh, Andaman, and Mozambique

• Numaligarh expansion: Most of the remaining capex will be completed by FY2025. The NRL rights issue covers the full equity infusion, with the first 25% call already paid and remaining calls as money is required.
• Domestic E&P run rate: Rs.4,500 to Rs.5,000 Cr annually for the next one to two years.
• Andaman exploration: Only G&G studies completed so far. Drilling is expected to start mid-next financial year, after June-July 2024.
• Mozambique: The operator is starting activities. Once force majeure is lifted, funding from ECS is expected, which would reduce equity contribution from partners. Any incremental cost escalation is likely to be raised as debt at the entity level, not through equity calls.
• Venezuela: Sanctions have eased but activity in the block has not started and production is much lower. Total commitment is Rs.42.5 Cr with ~Rs.6 Cr already spent. Management expects more clarity on prospects in the next one or two quarters.

Baghjan and Other Liabilities

• NGT committee report submitted: The report has not earmarked anything for Oil India to do. Guidance and instructions are directed to the pollution control board and government agencies. No additional provisions are expected from Baghjan.
• Separate disputed demand provision: A provision was also taken for interest on amounts not deposited in Assam and Arunachal Pradesh due to a High Court stay order, because the merit hearing was deferred and the timeline is now unknown.

Harish Madhav: "in that report basically nothing has been earmarked for Oil India to be done, guidance and instructions are to the pollution control board and the government agency to work out a plan, etc., but Oil India has not been asked to do anything or to commit any expenditure as of now."

Guidance & Commitments

Key Metrics