Dig These Profits

In a market plagued with uncertainties, it's quite relieving to find a scrip with the backing of a leading industrial house, a stable income growth and a business where the rupee depreciation improves margins. Going cheap. Hitech Drilling (Hitech) fits the bill. Promoted as a joint venture between Tata Industries and Sedco Forex International Drilling Inc, a Schlumberger group, Hitech offers drilling rigs on charter basis to various oil exploration companies. At present, the company has three offshore rigs deployed under contract basis. The first HITDRILL-1 is under operation with ONGC under renewed contract since October 1997 for two years extendable for another year under mutually agreed rates.

 

Its second offshore rig, Marine-201, is under operation for Cairn Energy, UK. in Ravva oilfield in the east coast of India upto November 1998 or completion of last well in hand whichever is later.

Its third rig, a floating production unit _ TAHARA. has the unique ability of storing and later offload the oil from exploration site to the storage terminals. This rig is currently hired by Hardy Exploration and Production since July 1997 for two years. Thus, all its rigs are currently operational and generate revenues.

The business of hiring drilling rigs is itself quite different from normal businesses. The drilling rigs are used by oil exploration companies for long periods and contracts are awarded on rates linked to global charter hire rates for a period of two to three years on fixed hire charges. These contracts would be renewed depending on the prevailing hire rates and the needs of the exploration companies. The revenues of such rig owners (like Hitech) fluctuate during the financial year in which the rigs are hired by the oil exploration companies or on renewal.

Hitech's income from operations rose to Rs 158 crore during 1997-98 against Rs 67.38 crore in previous year. Its overall expenditure increased to Rs 130.20 crore from Rs 49.65 crore. Driven by a whopping increase in income, its net profit surged 67.2 per cent to Rs 19.81 crore. The growth is further reflected in the first quarter of 1998-99 with income growing 162 per cent to Rs 40 crore. Operating costs doubled to Rs 20 crore over the previous quarter. Depreciation charges were up to Rs 4.33 crore from Rs 0.66 crore. Net profit was up 237 per cent during the same period to Rs 9.46 crore.

Hitech's solid performance can be attributed to a number of reasons. One TAHARA was deployed into operation during July 1997. Secondly the company renewed its contract for HITDRILL-1 deployed with ONGC during October 1997 at higher rates. This boosted Hitech's revenues during 1997-98. This resulted in a twofold jump in the first quarter revenues of 1998-99. Avers an industry analyst, "Its HITDRILL-1 contract was renewed at approximately US $38,000 per day last year against the previously contracted rate of US $26,200 while TAHARA has been deployed at US 48,000." The company is well placed in the current situation with increased revenues while another major catch comes in terms of rupee depreciation since all its income is in dollars.

The outlook is buoyant as worldwide market for offshore jackup drilling rigs and new generation floating rigs continues to have more demand than supply. Jackup rigs utilisation is close to 100 per cent of serviceable units globally. Charter hire rates for jackup rigs continue to be high. ONGC's demand for charter hire has not been fully met and there is additional demand for rigs in India from private sector oil companies. The increase in global rig fleet is expected to be negligible in the next few years. Thus the current higher realisations would continue for another 2-3 years. Analysts expect Hitech to post at least 50 per cent growth this year. While income growth in future years would depend on renewed contract rates unless Hitech buys or leases additional rigs.

At current contracted rates growth seems assured further global charter hire rates are still comfortable. As such, Hitech would post hitech profits. Since March 1998, the scrip has consistently been trading in a range of Rs 65 to Rs 100. The current price of Rs 75 discounts the annualised first quarter EPS of Rs 18 by only four times, making it cheap. The scrip could peak to Rs 100-120 once second quarter results are declared. Buy on declines.