Oils Well That Ends Well

If one were to go strictly by past performance, Hindustan Oil Exploration Company (HOEC) would not figure on any investor's list. On the other hand, if one judges a stock by its future potential, the scrip is certainly worth a second, and even a third look.

Hindustan Oil Exploration Company (HOEC) was one of the first private-sector player to enter into oil exploration business, when the sector opened up in 1991-92. HOEC signed its first production sharing contract with the Ministry of Petroleum and ONGC in February 1993 as an operator for the Pranhita Godavari onshore block .

And since then the company has been bidding for exploration of various blocks on regular basis. In December 1994 (fourth round of bidding), it signed its second the production sharing contract in consortium with Tata Petrodyne for a block in the Cauvery offshore basin (PY 3). For this block HOEC has a production-sharing agreement for a 21 per cent share in a consortium with ONGC; Vaalco Energy of US; and Tata Petrodyne. In Septem-ber 1995 (the sixth round of bidding), it bagged three blocks in the Gulf of Cambay, in Gujarat. HOEC had bid for these blocks in consortium other international players. The negotiation for production sharing contract for these blocks is still be signed by the company. Besides these, the company has been awarded the Asjol onshore oil field for development in March 1995.

 

Oil exploration is a high risk and long gestation but a high return business. The success rate of exploration and exploitation in India is less than 10 per cent compared to the 20 per cent internationally. That is to say, one may expect to strike an oilfield for every 10 that it explores in India.

HOEC has been fairly lucky -- it has hit oil at its Cauvery offshore block- PY 3 -- the largest block it has acquired so far. As per the seismic study conducted by Netherlands Swell, an independent world renowned reservoir consultancy agency, this block has recoverable reserves of 25 million barrels of crude oil. Initially, the production will be around 5,000 barrels per day and can go up to a maximum of 10,000 barrels per day. Production from this block is expected to start from July 1997. Analyst points out that once the production from this block is stabilised, the company is likely to see a big jump in its net profit.

Also, the oil exploration sector has been classified as an infrastructure sector in the recent budget. Henceforth, this sector will enjoy a five year tax holiday and a concessional duty on imported capital goods. That's not all. Even the cess levied under the Oil Industry Development Act 1974 for the new exploration blocks has now been abolished. All these developments would help the company mobilise the debt and equity finances needed for its investments in oilfields at a nominal cost. Incidentally, HOEC is issuing 1.34 crore shares on a preferential basis to HDFC, IL&FS and Hardy Oil, UK, at a premium of Rs 15 per share. With this, the equity is slated to go up by Rs 13.4 crore, to Rs 43.40 crore. The proceeds are to be utilised to finance the development of various oilfields that the company possesses. Hardy Oil is already working with HOEC in the PY-3 oil field. HOEC is also in the process of evaluating other fields where it could participate in under the new exploration licencing policy.

HOEC has also diversified into downstream integration, through its joint venture, HOEC Bardahal. HOEC will distribute and produce auto additives produced by, Bardahal, the US giant. Initially, HOEC plans to distribute the products in the country, before launching onto full-fledged production.

HOEC'S's financial performance till now has been depressing. Its total income for the year ended March 1997 declined by 22 per cent to Rs 5.31 crore. Analyst also point out that a major part of its total income includes income from other sources. HOEC's net profit declined by 143 per cent to Rs 0.55 crore from Rs 1.34 crore in 1995-96. This decline in net profit is attributed to its provisioning for contingencies of Rs 1.00 crore in anticipation of exploration expenses that may be required to be written off later. Another area of concern, analysts point out, is the sharp 25 per cent rise in the effective day rates of hiring rigs. Since HOEC does not own any drilling rigs on its own, this could lead to an increase in the cost of its projects.

HOEC is currently trading at Rs 44, which 244 times its current earnings. Many analysts feel that the stock is rather expensive given its current earnings. But is earnings are slated to jump in this year, when production starts from the PY 3 block. Revenue from this block alone is likely to contribute between Rs 8 crore to Rs 9 crore to its net profit this year. That would translate to an EPS of around Rs 2. Thus, this stock is definitely worth accumulating at declines for long term gains.