See 6% hit to Oil India FY18 EPS due to royalty on crude: IDBI

Utpal Bora, CMD of Oil India told CNBC-TV18 that he is yet to review the directive in detail and added, “we are just examining how to pay, what to pay and our Director Finances are on the job so right now I will not be able to give any comments.”Below is the verbatim transcript of Utpal Bora & Sudeep Anand’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Sonia: If you can just start off by telling us what the damage will be in terms of the higher royalty burden that your company will have to pay? Bora: I have just joined yesterday only for your information, so I really don’t know the details. Just someone told me that some royalty needs to be paid as per the government directive. So, we are just examining how to pay, what to pay and our Director Finances are on the job so right now I will not be able to give any comments. Definitely we are working on it. Sonia: Can you at least tell us how much of your production is onshore because we understand that now the royalty will have to be paid on onshore crude production on gross realisations rather than net realisations. So, what percentage of your production is onshore? Bora: Our main production is onshore, last year we produced 3.22 million tonne of oil mainly from the Assam oil fields. Latha: So most of it is onshore? Bora: From Assam and then we have some small contribution from our overseas assets. That is a very small part; mainly the bulk of the production comes from Assam oil fields. I joined yesterday and I came to know that directive has came from the government to pay some royalty on crude Assam, mainly major operations are in Assam only. Our director finance is looking on it and we will be having a meeting on that, in fact today only so then we will decide what is to be done. Of course they will take it positively and we will examine it what is to be done so right now I am not in the position to make any comment. Latha: We were hoping that we will be able to give you a number from Utpal Bora but what are your own calculations in terms of the higher royalty out go? Anand: As per the government directive is that oil stream will have to pay the royalty on the basis of your gross realisation. As Oil India’s 100 percent output is coming from onshore asset and this is effective from February 1st 2014, so if we calculate the additional royalty burden for FY14, FY15 and FY16 for Oil India it comes to around Rs 612 crore. If we look at the FY18 where our crude oil price assumption is USD 60 per barrel we expect that the company’s EPS impacted by roughly around 6 percent. This Rs 612 crore is for the FY14, FY15 and FY16. 6 percent impact that we are talking about is for FY18. So, retrospective because it is implemented since first of February 1st 2014 the impact for the earlier years is Rs 614 crore for Oil India and this is for around Rs 1,294 crore for ONGC. Latha: This Rs 614 crore is only for one year or is it for the entire FY14 and FY15? Anand: For the entire 2014 and 2015. This is for the entire year from February 1st 2014 till year. Latha: What is the share price target for Oil India and for ONGC? Anand: ONGC and Oil India both we have an accumulate rating. ONGC we have a target price of Rs 250 and for Oil India it is Rs 402. Sonia: You said that Rs 1,294 crore is the accumulated impact for ONGC right? What would that earnings impact be that you have calculated for FY18 for ONGC? Anand: FY18 we are expecting its earnings per share (EPS) to go down by around Rs 0.4 per share which is around 1.7 percent of our existing EPS estimate of Rs 24.2 per share. Latha: Why this positivity on ONGC? We are not seeing crude prices really go beyond that USD 45 per barrel mark. Gas prices if anything in the next round in September could get even lowered further isn’t it, so why the buy call on ONGC? Anand: Gas price we are expecting it to go up from in the next revision which is expected from October 1st because all the benchmark prices have gone up. At the same time we are expecting that crude oil price to move up from FY18 onwards because we have seen the decline in output from US and also output from the Syria and Libya we are not hopeful that it will pick up. At the same time we are expecting about 1.2 million barrel per day of demand growth to be happen in 2017. So, that will give some kind of a boost to the crude oil price. Even if you look at the fiscal deficit, your breakeven price for fiscal deficit Organisation of the Petroleum Exporting Countries (OPEC) countries it is much higher than the current price. So, we are expecting that crude oil price will move up but not that significant as we had seen earlier but around USD 60 we are expecting for FY18 and USD 45 for FY17.