Dark Horse in Oil Exploration. Interlink Petroleum Ltd. (Rs. 36/-)

Rationale for Recommendation:
A.    IPL has rights to develop 2 oil fields in Gujarat.
B.    Market Cap of IPL is just Rs. 66 crs. as against 4200 cr. market cap of HOEL and 420 crs. market cap of Selan.
C.    IPL has been bought over by JIT SUN, Singapore and promoter’s stake is nearly 70%.
D.    Crude prices have started recovering which bodes well for IPL and it can be a potential take over target.

Background:
Incorporated in 1993, IPL is engaged in the business of Oil & Gas Exploration activities.  Following the opening up of Hydro Carbon Sector by Government of India to attract private investment, IPL was amongst the first few private sector companies to be awarded the rights to develop Baola Field in Gujarat.  Production Sharing Contract for Baola was signed in 1995.  This was followed, in 2001, by award and signing of PSE for Modhera Field, also located in Gujarat. Both the fields are located in the Petroliferous Cambay Basin which has excellent infrastructure and are in close proximity to the local market for Oil & Gas.

Baola Field has 2 wells (Baola 1 and Baola 5).  Upon grant of permission to produce in 2001, IPL started production of gas @ 12000 Standard Cubic Meter from Baola Well 1 and supplied gas to the consumers in the local area.  Mining lease for the field was granted in 2004. However, production had to be suspended due to ingress of water in the well by end of 2004.

Financial Performance: Rs. In Crs.

	2008 – 2009	2007 – 2008
Total Income	0.67	1.22
Net Loss	1.89	1.38
Equity	18.41	8.10
Reserves	6.92

Since production is yet to start, IPL did not had any sales revenues and incurred losses due to expenses made for hiring personnel and creating infrastructure.  However, during the year, Company’s control and management underwent  a big change.  IPL has been bought over by JIT SUN of Singapore, an investment arm of Zurong Group.  New promoters are well known group in oil asset management and have clients like Exxon and Chevron in West and China Petroleum in the East.  Oil fields of IPL are adjacent to HOEC and have potential of 12,000 BOPD from each block which will be significantly higher than HOEL.  JIT SUN hold 69.77% Equity of IPL (through preferential offer and open market offer).

Future Outlook:
1.    Modhera Oil Field:  New Management has obtained mining lease for Modhera Oil Field which is also located in the same Cambay Basin as Baola Field, the production sharing agreement for which was signed in the Year 2001 and has taken over the field in February 2009.  IPL has decided to develop Modhera Field by acquiring Seismic data and drilling new wells.  Production from Modhera Field is expected to start in 2011.

2.    Baola Field:  ONGC had dug 6 wells in this field of which 2 wells were operational till 4 years ago.  Subsequently, production had stopped due to water ingress.  IPL has decided to acquire fresh Seismic data for Baola Field which is expected by November 2009.  Results of Seismic data will enable IPL to locate and drill new wells in the fields subsequently.  Production from the same should start in 2010-11.  GSPL and GAIL have already come forward with offers to lift the gas once field becomes operational.

IPL was also awarded one small block in NELP VII Round but Company decided to focus and develop existing assets and did not sign PSE for this block.

Valuations and Recommendation:
IPL’s Operations will start generating revenues only from 2010-11.  However, scrip appears a good buy for medium and long term considering the following:

1.  Crude prices are unlikely to come down and may rather go up due to recovery of global economy.  Hence, IPL should have huge profit margins in 2011 and beyond.

2.   New promoters hold 69.77% stake.

3.   In 2008-09, HOEL had revenues of just Rs. 98 crs. but market cap is Rs. 4200 crs.  Similarly, Selan has market cap of Rs. 420 crs. although revenues are under 100 crs. On the other hand, IPL market cap is just Rs. 66 crs. despite the fact that its Oil fields are adjacent/next to HOEL and IPL Oil Fields may have much much higher/bigger oil reserves.  New promoters have started working in the right earnest and aggressively.

4.   Mr. Bora (Ex-CMD of ONGC) has become Chairman of IPLunder whose leadership IPL can reach new heights.

Once Seismic data are received and drilling for wells starts in early 2010, share price of IPL can witness huge jump.  There are rumours in the market that IPL may become acquisition target by a big Industrial House.  Investors with patience having medium/long term perspective can buy big quantity for multibagger gains.

Share price can be Rs. 60-70 in 6-9 months.  Don’t be surprised if scrip crosses Rs. 200/- in 2011.