Rising crude oil prices and the expectations of a hike in domestic gas prices have benefited Oil India Ltd (OIL), and investors seem to have taken note of it. Shares of the company scaled 52-week highs on Thursday, having risen 76% year-to-date.
Another boost for sentiment is the company’s improving outlook on liquidity and debt. Earlier this month, the company sold 4.9% stake in Numaligarh Refinery Ltd (NRL) to the government of Assam. This takes the total stake sale by the company to 8%. The ₹780.42 crore from the sale of the NRL stake will help the company repay short-term debt.
This is a credit positive event, global rating agency Moody’s Investors Service Ltd pointed out. “This repayment will improve OIL’s liquidity and financial flexibility," the agency said in its release.
The stake sale in NRL is part of a scheme wherein Oil India had acquired shareholding in the first place in March this year from Bharat Petroleum Corporation Ltd last year as part of the latter’s privatization process.
The additional 10.5% in NRL was purchased on behalf of the Assam government with an understanding that the state would buy it back.
This buyback is crucial as the proceeds would help OIL retire debt it has piled on. As of March, the company’s debt was ₹19,720 crore, of which ₹4,300 crore matures this year.
The Numaligarh refinery has helped the company expand its scope from being an oil producer to becoming an integrated oil and gas company. NRL’s June quarter overall gross refining margin (GRM) was boosted by an excise duty benefit of $30 a barrel, compared with $5.2 a barrel core GRM, analysts at Nomura Research pointed out in their post Q1 results note.
With the NRL acquisition, OIL’s earnings are well-hedged to withstand crude fluctuation, according to analysts. As such, higher crude realizations were a factor behind the robust earnings in June quarter. Crude realizations were up 12.5% sequentially, helping the spike in earnings before interest, tax, depreciation and amortization.
That said, investors need to keep a watch on the speed with which the company brings down its debt.
The NRL stake sale is just one step towards this and further debt reduction would depend on internal accruals and the completion of the transfer of the remaining 2% of NRL stake to the Assam government.
