Oil India’s strong oil growth and NRL margins offset weak gas volumes

Investment View and Target Price

Motilal Oswal Financial Services reiterates its Neutral rating on Oil India and revises its sum-of-the-parts target price to Rs 485. The broker is positive on strong oil production growth, robust Numaligarh Refinery Limited (NRL) margins and faster drilling activity. However, it remains cautious about weak gas volumes, potential dry-well write-offs and subdued gas realisations in a weaker crude-price environment.

Key Positives and Monitorables

• Strong oil production growth and higher-than-expected oil realisation.
• Robust NRL margins and improved distillate yield.
• Faster drilling activity, with management targeting about 100 wells in FY27.
• Weak gas production and sales remain a near-term concern.
• Potential dry-well write-offs and subdued gas realisations are key risks.
• DNPL and IGGL feeder-line connectivity, as well as the refinery expansion ramp-up, are important monitorables.

1QFY27 Financial and Operating Performance

Oil India reported 1QFY27 revenue of Rs 79.6 billion, which was 9 per cent above Motilal Oswal's estimate. Oil sales were 8 per cent ahead of estimates at 0.92 million tonnes, while gas sales were 11 per cent below estimates at 0.62 bcm.

Adjusted PAT was supported by higher other income and a lower tax rate than expected. Despite the increase in oil production, the decline in gas production left total oil and gas production broadly unchanged year-on-year.

NRL Delivers Strong Refining Performance

NRL reported a particularly strong 1QFY27, with PAT of Rs 13.1 billion compared with Rs 4.9 billion in 1QFY26. Performance was supported by a gross refining margin of US$35.95 per barrel.

• Crude throughput was 791.2 thousand tonnes.
• Distillate yield improved to 87.6 per cent from 85.4 per cent a year earlier.
• Management reported capacity utilisation of 105 per cent.
• The reported gross refining margin includes a US$3 per barrel inventory gain.
• The excise-duty benefit is not included in the reported margin, while the margin is net of special additional excise duty.

Production, Drilling and Pipeline Outlook

Management has guided for oil production of 1 million tonnes in 2QFY27. It plans to increase drilling from 74 wells in FY26 to about 100 wells in FY27, comprising 42 exploratory wells and 57 development wells. Management aims for at least about 10 per cent annual growth in well count thereafter.

Gas production is expected to remain relatively flat or grow slowly through FY27 and 1HFY28, with a sharper ramp-up expected from 2HFY28. Completion of the approximately 200 km DNPL feeder-line stretch in two to three months is expected to support an eventual 1.5 mmscmd increase in gas offtake. A further 2.5 mmscmd could be added after pipeline projects become operational.

The timing of DNPL and IGGL feeder-line connectivity is a key monitorable. IGGL feeder-line connectivity is expected by FY28-end.

Deepwater Exploration and Regulatory Provisions

Deepwater exploration represents a medium-term opportunity. About 55 per cent of Oil India's acreage is offshore, including deepwater and ultra-deepwater areas. Management expects the first deepwater rig by June-July 2027 and a second rig by March 2028.

Processing and interpretation of approximately 40,000 square km of seismic data across the Mahanadi and KG basins is expected by January 2027. One Mahanadi well is planned in FY28, with about Rs 8 billion of government funding support.

Oil India recognised a Rs 2.9 billion provision in 1QFY27, including Rs 1 billion of interest. This took cumulative Service Tax and GST provisions to Rs 50.4 billion as of June 30, 2026.

Sum-of-the-Parts Valuation

Motilal Oswal's Rs 485 per share target price is based on the following sum-of-the-parts valuation:

Key Risks to the Outlook

The broker expects NRL to reach 75 per cent capacity utilisation by FY28-end, but flags the refinery expansion ramp-up as a risk. The start-up of the crude distillation unit (CDU) and vacuum distillation unit (VDU) has shifted to October 2026 from July 2026, while full capacity expansion to 9 million tonnes per annum is targeted by March 2027.

Other risks include weak gas volumes, slow gas production growth through 1HFY28, potential dry-well write-offs, subdued gas realisations in a weaker crude-price outlook and delays in DNPL or IGGL feeder-line connectivity.