Hindustan Oil Exploration Company (HINOIL)

India Focused Asset Portfolio tailored to deliver our strategy of the rapid development of discovered resources Strong offshore presence with anchor assets on both the east and west coast. Established industry-leading footprint in most prospective areas –North-East and Cambay
he establishment of the Hindustan Oil Exploration Company (HINOIL) in 1983 prompted the government's decision to permit private sector involvement in India's oil and gas industry. It was the first business in the private sector to start exploring for oil in India. Over the course of three decades, the company, which has its headquarters in Baroda, has developed into a significant independent participant in exploration and production (E&P). Exploration, development, and production of natural gas and crude oil are activities carried out by HINOIL. It is in the Oil Exploration and Production business as of 2023, bringing in INR 6.37 billion in sales and INR 2.28 billion in net income.

About Company

The establishment of the Hindustan Oil Exploration Company (HINOIL) in 1983 prompted the government's decision to permit private sector involvement in India's oil and gas industry. It was the first business in the private sector to start exploring for oil in India. Over the course of three decades, the company, which has its headquarters in Baroda, has developed into a significant independent participant in exploration and production (E&P). Exploration, development, and production of natural gas and crude oil are activities carried out by HINOIL. It is in the Oil Exploration and Production business as of 2023, bringing in INR 6.37 billion in sales and INR 2.28 billion in net income.

B-80 field is prepared to supply continuous CFs for additional developmental endeavors.

• HOEC is the operator of 10 of the 11 blocks in its portfolio, which consists of 3 offshore and 8 onshore blocks.
 • Better realization from the Dirok field and the commercialization of the B-80 block in Mumbai Offshore contributed to the FY23 standalone revenues of | 381 crores, up 192% YoY. At 195.3 crore, standalone EBITDA increased by 158% year over year. The business revealed a PAT of | 178.5       core, up 398% year over year.

Important indicators of future price movement

1. Every asset in the portfolio is generating income. HOEC emphasizes established oil and gas assets in order to reduce exploration risk. Its portfolio assets, which include Kharsang, Cambay, B-80, Dirok, PY-1, and Kharsang, are all in revenue mode. Developmental drillings are scheduled with the goal of boosting production from individual wells (Dirok, Cambay, and B-80 in FY24, followed by PY-1 in FY24).

2. Stabilization of the B-80 well: The well is being optimized to extend the field life plateau and retain the government share at one-third, which will lessen future cash flow volatility, even if B-80 would account for the majority of HOEC's profitability. In the medium to long run, the company's product mix will profit from the current decline in the gas-to-oil ratio.

3. Increased capacity in other assets: three development wells are planned to be drilled in order to increase gas production from the current 35 mmscfd to 55 mmscfd. Dirok is directly connected to the Duliajan hub by a 35-kilometer pipeline. The three Cambay properties (Asjol, North Balol, and Palej) and PY-1 are additional assets that only slightly affect HOEC assessments. Within the following two years, the management hopes to implement authorized Field Development Planning (FDP) in order to realize field potential.

Company Overview

• Hindustan Oil Exploration Corporation (HOEC) is the first privately held corporation in the upstream oil and gas sector in India. After being founded in 1983, the company was initially listed on the stock exchange in 1990. HOEC is a company based in Vadodara that conducts research, develops, and extracts crude oil and natural gas from oil fields.

• Geographically dispersed over Tamil Nadu, Gujarat, Assam, and Arunachal Pradesh, HOEC assets have a balanced portfolio of production and development assets. There are three offshore and eight onshore blocks in HOEC's portfolio. Ten blocks of found oil and gas and one exploration block make up the portfolio. HOEC holds operatorship in 10 of the 11 blocks. The estimated proven and probable (P+P) reserves were 41.15 MMBOE as of March 31, 2022.

• The average gross production for HOEC in FY23 was 10101* boepd (the number of production days for B-80 is expected to be 194), but the net output was 3759* boepd. B-80 and Dirok made major manufacturing contributions. Natural gas accounts for 81% of production, with crude oil accounting for just 19%.

• The net production of HOEC climbed by 54% in FY23 compared to FY22. Net gas output rose 46% annually after B-80 production began, while oil production increased 40% annually. FY23 standalone revenues were | 381 crores, up 192% YoY, as a result of better realization from the Dirok field and the marketing of the B-80 block in Mumbai Offshore. Standalone EBITDA rose by 158% year over year to 195.3 crore. The company reported a PAT of | 178.5 core, up 398% on an annual basis.

Investment Justification

The B-80 block is crucial for growth in the medium run.

The B-80 block, an offshore asset situated in the Mumbai High Basin, was acquired by Hindustan Oil Exploration Company (HOEC) during the 2016 Discovered Small Field (DSF) bid round. In addition to being the operator, HOEC owns a 60% participation stake in the B-80 block. Their field development plan was approved before any other operator. The project includes drilling two new subsea wells, establishing a Single Point Mooring System (SPM), deploying a Mobile Offshore Processing Unit (MOPU), and mobilizing a Floating Storage & Offloading (FSO) vessel.

In the 2016 Discovered Small Field (DSF) bid round, Hindustan Oil Exploration Company (HOEC) purchased the B-80 block, an offshore asset located in the Mumbai High Basin. HOEC is not only the operator of the B-80 block but also holds a 60% participation interest in it. They were the first operator to have their field development plan authorized. A Single Point Mooring System (SPM), a Mobile Offshore Processing Unit (MOPU), the mobilization of a Floating Storage & Offloading (FSO) vessel, and the drilling of two additional subsea wells are all part of the project.

• In Q4 of fiscal year 2023, HOEC's B-80 field produced roughly 17 million standard cubic feet of gas per day and 1350 barrels of oil per day from two wells, D1 and D2.

• Gas exports, done through ONGC and Gail pipelines, started on November 4, 2022, while oil production began on December 8, 2022.

• The produced oil is stored for future online auctions to domestic refineries, with the revenue from these sales expected to be recorded in fiscal year 2024.

• Agreements to sell the gas have been made with GSPC and Indian Oil, with pricing tied to Brent oil prices.

• In fiscal year 2023, the B-80 field generated about 144 crore in revenue, with a significant increase observed from the third to the fourth quarter (31 crore to 87 crore).

• After stabilizing operations, they expect production to rise to 1600 barrels of oil equivalent per day in 2024 and 1900 barrels of oil equivalent per day in 2025.

• Over the medium to long term, a shift towards more oil production compared to gas is anticipated, which should enhance overall revenues.

• Management aims to optimize the government's revenue share from the B-80 field and extend the field’s life while maintaining reservoir pressure.

An increase in production-driven capacity

• In fiscal year 2018, the Dirok field became more significant to HOEC after commercial production began and the Hollong Modular Gas Processing plant and a 12-inch pipeline were established. During the first phase, HOEC allotted roughly 280 crores for exploratory activities (total outlay: approximately 700 crores) and roughly 127 crores (total outlay: approximately 455 crores) for developmental initiatives. 

•  In addition to managing activities in the Dirok field, HOEC maintains a 26.9% share.  Production at Dirok was 1717 barrels of oil equivalent per day in the fourth quarter of fiscal year 2023. This amount included 137 barrels of oil and 8.1 million standard cubic feet of gas per day. Between 350 and 420 crore have been set aside in the budget for the next stage of development. 

• A large amount of this funding will go toward expanding the Hollong plant so that it can produce up to 55 million standard cubic feet of gas per day instead of the current 35 million.

• A brand-new 35-kilometer pipeline is intended to distribute natural gas from Kusijan to Duliajan. This pipeline project has a budget allocation of between 30 and 40 percent.

• Three more wells are scheduled to be drilled, and the necessary environmental clearances and approvals for an 18" pipeline have already been obtained.

• After operations at the B-80 field stabilize, more gas from Dirok is expected to be delivered.

• Seven deals for the sale of premium gas have been reached, pushing the selling price over US$ 1 per million British thermal units—above the government-mandated prices. - Premium gas accounted for 25% of Dirok's total sales as of the fourth quarter of the 2023 fiscal year. 

• HOEC does not currently share the government's revenue from production at Dirok under the terms of the current Production Sharing Contract (PSC) arrangement.

Areas that have recently been added to the production mix

• With different participation interests, HOEC oversees multiple blocks that contribute to its earnings, most notably three Cambay blocks: North Balol, Asjol, and Palej. In Q4FY23, they produced an average gross production of 73 boepd and 0.343 mmscfd of gas.

• There are plans to drill more wells in these blocks in order to increase output. With a 40% participating stake and a tested oil output of 402 barrels per day, the Kherem block was awarded to HOEC in 2016. However, the petroleum mining lease is still pending and requires forest clearance. 

• ONGC is the operator of the PY-3 offshore field, in which HOEC has a 21% stake. The field was shut down after production reached a peak of 3300 boepd in 2011, however, there are intentions to resume when a PSC extension is approved.

• In 2019, HOEC bought Umatara, wherein it maintains a 10% participating interest and shares operatorship with IOC. The Field Development Plan (FDP) has been approved, and environmental clearance has been given.

• With a 100% participating interest, HOEC won the Greater Dirok block in the 2019 OALP Bid Round. Since it's an exploratory block close to Dirok, initial environmental evaluations are scheduled for its growth. 

For HOEC to continue growing financially and use the cash flows it generates to pay down debt, B-80 must stabilize. Return on Equity (RoE) and Return on Capital Employed (RoCE) are expected to trend positively after stabilization, demonstrating HOEC's emphasis on long-term field sustainability and improvement of the balance sheet. 

Financial Summary

Cash Flow &  Valuation Ratios 

Concall  Analysis

• The company has outlined capital expenditure (Capex) initiatives aimed at boosting production and realizing significant value, particularly within the Kharsang block. In the coming 6 to 9 months, an appraisal well is slated for drilling in this block at a projected cost of Rs. 40 crores. Moreover, there are plans to drill an additional three wells in the B-80 zone by the fiscal years 2026-2027, with an allocated Capex budget ranging from $40 million to $45 million. This budget is similarly earmarked for the drilling of three more wells in B-80 as part of the future Capex agenda.

• In the first quarter of fiscal year 2024, the company's results were affected because there was less gas being taken from Dirok due to some customers closing down temporarily. However, production at B-80 was steady during this period, and it's back in action after some maintenance work. It's expected that within 6 to 9 months, things at B-80 will become more stable, with the field producing on average about 300 to 330 days in a year.

• The company also has a plan to keep a reserve of 200,000 barrels of oil and sell an extra 400,000 barrels from B-80. The quality and price of the oil from B-80 will be figured out through a process known as a crude assay.

• There's a focus on making production at B-80 more stable and sorting out some operational challenges, like the buildup of paraffin in the pipelines used for exporting the oil. As for the production in other fields during the second quarter, it's hard to predict at the moment. It will depend on how well the fields are performing and any issues with the offtake of the products.

New Products:
 The company has made good progress in building pipelines in a challenging forest area for the next stage of work at Dirok. They're also looking into the potential of various blocks by re-examining and understanding the seismic data.

Guidance:
 The connection to the National Grid is set to be finished around February or March 2024. Despite some temporary issues, the company is optimistic about the value of its assets growing over time. They expect the situation at Dirok to get better with the National Grid connection in the coming financial year and are actively working to sort out operational problems quicker and get production steady.

Financials:
 For the first quarter, the company made Rs. 108.69 crores in revenue on its own, though revenue from Dirok dropped due to lower sales. The profit after all expenses for the quarter was Rs. 66 crores. The B-80 field has the potential to bring in nearly $2.5 billion in revenue, judging by the amount of reserves there.

Management and Communication:
 There's talk about the retirement of the CEO, Mr. Elango, and some concerns regarding timely communication. Mr. Elango's retirement is his own choice, and the company trusts its team to handle the current challenges and keep operations stable. They're boosting their technical team and resources to tackle challenges, especially offshore. They value the support and input from investors and are committed to bettering operations. Mr. Elango will still own shares in the company.

Regulatory and Stakeholder Communication:
 The company plans to share updates on its oil and gas activities quarterly, and will immediately let the market know if there's any major loss in value or lasting damage. They're also focusing on sharing important information with regulatory bodies and stakeholders promptly.

Valuation:

The company's Net Profit After Tax has grown significantly over the last 5 years. Although this is the only measure which has witnessed a positive growth rate. This growth can be seen majorly because of the reduction of other operating expenses and Exceptional items such as gain on sale company's Mohali Plant which resulted in higher profits. The company has shown a consistent annual profit every financial year despite having decreasing sales, due to this consistency in profits we can see a greater increase in the company's reserve and surplus. The company's asset for the last fiscal year stands at INR 1949 Cr. which has grown at a rate of 9.7% CAGR over 4 years. The liquidity ratios of the company have increased signifying a stronger liquidity position as compared to last financial year, this is because the Company has not made any major fund-based borrowings this year and has managed working capital requirements from internal cash generation. The company's impactful actions such as solid price management, stringent cost measures, rigorous working capital management, and curtailment of uncommitted and non-essential capital expenditures have led to an increase in efficiency ratios.

Conclusion

The company is actively addressing its operational challenges, particularly at Dirok, and has a roadmap for future developments like the significant progress in the Dirok pipeline construction and seismic evaluations. The promising revenue potential from the B-80 field, alongside the proactive steps towards enhancing technical capabilities and addressing offshore challenges, further paints a picture of growth and resilience. The commitment to transparency through regular updates and timely disclosures to investors and regulatory bodies also adds a level of trust and responsibility. With these factors in mind, the company presents a potentially viable investment opportunity, making it an attractive option to consider for acquisition.

Articles

Comments