Hind oil exploration is this a multibagger bet?

Stock Opportunities Untested - but worth a good look
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Another poor quarter in terms of natural gas offtake. PY1 and Dirok offtake was poor. No updates on offtake by private player for PY1 gas and demand still remains poor for Dirok gas even CAA agitations were over. It is to be noted that lockdown was implemented only by March 24 and natural gas rates were reduced to $2.39/mbbtu on April 2 . So the effect of both these on Q4 may be very little. OPM margin for the quarter came in at 32 % compared to above 60% in the previous quarters. (May be due to increased proportion in fixed costs). Revenue degrew by 32% and profit by 67 %.

Q1’21 is expected to be even more lacklustre with the reduced tariffs and the reduced demand during the lockdown. PY-1 had its operations temporarily suspended from July 3 to July 14. It needs to be seen whether the company is able to generate any profits at all in Q1. The natural gas prices comes up for revision on October 2. The current pricing formula takes into account the volume weighted annual average of the prices prevailing in Henry Hub(US), National balancing point(UK), Alberta(Canada) and Russia witha lag of one quarter. As the international prices of these natural gas supply countries were languishing at less than 1.9 $/mmBtu for most of the previous quarter, it is expected to come down to those levels during the next pricing which will further deteriorate the gas dynamics. The only respite may came from B-80 oil fields which has pricing freedom. IGX has floated first gas exchange in the country and the various contracts will be available for trade at three physical hubs viz, Dahej,Odru and Hazira. In the first day of operation of IGX rates of 4.07 $/mmBtu was discovered. (Wasnt able to find out rates for latest contracts). So B-80 may come out to be a saving grace for the company.

Globally crude and natural gas has recovered from the lows. Natural gas prices in US have moved to 2.39$ in the past week expecting higher demand due to the heat waves in US. Prices may firm up further if the industrial cativity increases. The way the OPEC and the US cartelises the global crude prices provides a clear downside support to the prices. They were able to curtail supply and bring back prices back to 40$ levels for crude in the lockdown period. As per reports the number of shale wells has come to a new low since 2005. It seems like crude prices may gradually trend upwards.

Key minitorable from Q1’ result

  1. B-80 project update
    2.Management commentary on PY-1 gas offtake, as they have a contracted rate of 3.66 $/mmBtu.
    3.Management had earlier indicated they may go for drilling more wells, to take advantage of low drilling costs. Updates on drilling activities and how the cost is managed will be interesting to see.

Disc: Invested and hence biased. Holding from precovid levels.

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hoec clarification.pdf (1.1 MB)
Hoec’s disclosure reg liabilities

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With the recent spike up in crude oil prices decided to have a look once again on Hind oil, having exited a major part of holding by mid Q3. The crude oil prices doesn’t have any major affect on its earnings as the company is predominantly into gas. Recently went through the concall so decided to just note down the major points.

The company’s dependence on gas may change once B80 starts production. As per the earlier updates from the company the field was supposed to produce first oil by June’20. However, the project is yet to start production. Some delay may be attributed to covid. MOPU was ready to sail out of Sharjah as per Q2’ presentation. Status is the same as per Q3’ presentation.

As per the company MOPU is set to sail from Sharjah within a few days, the whole process was delayed as many components required for the process were not available due to the pandemic. As per the company concall all the components like flexibles, calm mooring system etc are procured currently and are ready for installation. The installation will start shortly and is expected to be completed by the end of weather window by the mid of May. Company seems very confident in starting production from B80 by Q1. The company expects to generate EBITDA of 200 crores per year from B80, at crude prices of around 50$. However, the clarity on the quality of crude produced from B80 is yet to be known. The company said that by the next concall company will be able to provide details on it. The company has raised its stake in B80 field by 10 % citing capex requirements which the partner was unable to bring forward. The reply regarding valuation of the B80 field was a bit vague. As per management 70 -80 crores were spent for this addl stake which will be solely used for capex at B 80.

Dirok is currently producing at full capacity, and offtake also looks good. But since the prices are currently at a record low of 1.79$/mmBtu, revenue was seriously affected. The prices will come up for revision on April 2, The prices are expected to be revised upwards to around 2.3 $( taking into consideration the natural gas prices for the last 6 months). Company is expecting a slight premium to the govt prices as govt has authorized e bidding of gas. Even then, as the gas cannot be sold outside the north east , the company will have to sell the gas to the same set of consumers that they are selling to currently. As such the premiums are expected to be minimal unless there is a significant increase in demand for natural gas. PY-1 production is currently suspended as production is affected due to intermittent offtake issues. Offtake was very low in the past few quarters but the company didn’t mention any production issues till the last concall. They even mentioned about a deal with a pvt player to increase the offtake from PY1. So that puts a question on the credibility on the company’s disclosures and guidance.

Crude prices have moved up significantly over the past one month. With OPEC holding on to the production cuts for the month of April, the prices are expected prices are expected to be strong. Demand has improved significantly from covid period, however its still below pre covid levels. If OPEC + countries holds on to the current production curtailment we may even see daily demand exceeding production, which make crude an attractive cyclical play in the current inflationary scenario. With new capacity coming online in the next couple of months as per management, it can be a good bet. Gas produced from B80 will have marketing and pricing freedom and also Gujarat, the target market has a very developed gas market which can assure good offtake as well

Key risks

1.The B 80 production is already around 1 year behind initial schedule, so any further delay will lead to having the wrong pick to play the crude cycle as the company is having very neglible crude oil production currently and natural gas prices are govt regulated.,

  1. As per the management a production of 8000 boepd is expected. Any downward revision of the estimate or the estimate reserves can be a negative.

  2. As the crude price goes up OPEC + countries may have have a tendency to increase production, which may put downward pressure to the prices

  3. A second wave of covid may put pressure on the demand side

Discl: Invested at around 2 % of portfolio and hence biased. Trying to understand the cycle.

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Is it 200 cr EBITDA or Profit or Cash ? If true at oil price 50 USD , we can say there is margin of safety at 60-65 USD. taking 50-100 Cr from other projects and 200 Cr from B-80, we get a total of around 300 Cr profit per year. This is going at around 4 times P/E. Looks attractive to me if the oil upcycle continues which is likely to be the scenario if oil demand comes back to pre covid level. Supply is likely to be less than precovid level bcos of production disruptions and also focus on Green energy. I think Green energy is a little hype at the moment as they cannot meet demand spikes in short term.

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As per management they expect 200 crore EBITDA on their 60% participating interest. Currently, crude price looks kind of cartelised by the OPEC + countries. They have controlled the prices by curtailing the supply. So unless there is a second wave of covid severely affecting demand, I don’t see any downside risk to crude prices.

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Lets work out the profit. We need to know the Production Sharing agreement details.

4000 BPD ( 50 % of total 8000 BPD of B-80) X 300 days per year X 60 USD PB X 70 INR=500 Cr
Total Revenue approx 500 Cr.
Any idea on Interest, depreciation and revenue sharing with govt? Generally a little bit complicated.

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B80 production delayed.pdf (609.8 KB)

First oil from B80 is delayed to 3 rd quarter of FY due to Tauktae.

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Is it time to look at upstream Oil and Gas companies??
India is highly reliant on import of Oil and gas for its requirements. Lets look at the level of imports we have
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Source: care rating
It’s clear that the imports are constantly increasing and reached a point where imports have exceeded the domestic production. While crude prices are determined by market forces, Domestic gas prices are fixed by Gas pricing policy, 2014 which considers the weighted average of gas prices in US ( Henry Hub), UK(National balancing Point ), Canada ( Alberta Gas), Russia with a lag of one quarter. Prices are fixed for a period of 6 months once in April and October every year.
Let’s take a look at the gas prices in the past.

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Source: PPAC
Gas prices for normal fields have come down from 3 .69 $/mmBtu in the Oct’19 to 1.79 $ in Oct’20 to Sept’21. The gas prices are currently at 7 year low. Due to the above pricing where the prices are fixed based on the average in gas surplus countries, the landed cost of gas imports are higher than the domestic gas prices.
In the past 6 to 7 months global gas prices have moved up significantly due to the North American heat wave. The current gas price at Henry Hub is 3.80 $/MMbtu. Gas industry is expecting a price rise of around 50 to 60 % when gas prices are up for revision in October( Source interview by ONGC chairman).
I have focused on a much smaller player, Hind Oil exploration. The company started production of natural gas from Dirok gas field in 2017 where it has a 27% participating interest.
As part of reforms on natural gas pricing norms govt has up with norms for e bidding in case of fields with marketing and pricing freedom. The company was for some time talking about an e auction and finally in Q1. The company has up with an e auction for its gas produced in Dirok field on a firm and fall back basis in Q1’21.

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source: company Q4’21 presentation
Company received very good bids from various customers for the whole quantity on offer and company expects to start sales a per the new contract from Q3’22. As per the company contracts are in final stage of conclusion. Thus e auction may further increase revenue in addition to the increase in Govt administered prices in Q3’22.

Production updates from B80
The B-80 field was awarded to the company in the Discovered small field round 1 held by DGH where the company has a participation interest of 60%(pending govt approval). The company expects to produce 5000 boepd of oil and 15mmcmd of gas( 8000 barrels of oil equivalent). The company’s share of revenue from oil will move to 37% from 13% once the block starts production. They have marketing as well as pricing freedom for gas produced from this field. And the gas produced will be evacuated through ONGC pipeline and Gujarat will be the target market. This assures better offtake as well as premium for gas. The field was supposed to deliver first oil by June 2020. But the project got delayed multiple times due to covid pandemic and weather uncertainties. Finally, it was expected to start production from the site in the weather window in April – May’22. However, the company had to halt the project through midway due to Tauktae. As per latest investor presentation Q1’22 company has informed the major parts of the project are over and production is expected to start in Q3’22.
Updates from the company as in latest investor presentation.

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As per initial estimates the whole final part of the project was expected to be completed within 45 to 60 days.
Excerpts from concall from Q221.
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As a significant part of this final part is over now, the company is expected to start production in Q322 itself

The gas produced will be sold out immediately and will be revenue accretive from day 1 of production. Company has close to 900000 barrels of oil storage capacity and company is not planning to start sale of oil immediately on oil production. They intend to keep on producing for 2 months and then come up with a sale. So the revenue from oil sales will be more significant in q4’22 only.

Key risks
 As already mentioned B-80 was initially projected to deliver first oil by June 2020. The timeline for project completion was changed twice since. The company attributed the delay to covid pandemic wherein company was unable to procure critical infrastructure items like flexible pipeline and SPM. Then there was the weather uncertainties. Eventhough this items are all procured now, monsoon is still an uncertainty.
 The quality of oil is still to be tested. The company has mentioned that the quality will be close to that of Brent crude but it is yet to be verified.
 International prices of both crude and natural gas is very strong as of now. Natural gas price had great run due to severe heat waves in North America. But once heat waves subside the natural gas prices may start correcting. And this may affect the price revision in April 2023. Similarly the way OPEC carries out its business will decide the crude prices.
 The company is expected to get benefit of e auction from Q3’22. However, it is to be noted only 1/3rd of the contract are on firm pricing and the remaining will be on fall back pricing which means the offtake and pricing on 2/3rd production will be based on natural gas demand. The company has had offtake issues for gas produced in Dirok fields in multiple quarters in FY ’20. Dirok sales will depend on demand in North East until gas grid connects North East with rest of the country.

To conclude there are multiple tailwinds for the oil and gas industry in the form of higher administered gas prices expected when gas price comes up for revision in October 2022. The company has additional advantage of e auction prices for its Dirok gas from Q3’22 in addition to commencement of production of oil from B80, one of their priced assets.

Discl: Invested in Hind Oil from lower level and hence biased. Tracking ONGC as well. Currently holding purely as a cyclical bet. Has been holding and tracking the company since 2017, has been a disappointment for long. Not a SEBI registered advisor. Please do your own due diligence.

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OK it’s go time with this one. Current quarter (Q3 FY22) is a critical quarter (feels like every Q is a cliffhanger with this co.)

When it comes to HOEC → Trust But Verify. So here are my call notes (with my comments):

  1. B-80 will start in the earnest when the waves are below 1m. All the equipment is in place. (You can check the wave height here ESSO-INCOIS-Indian National Centre for Ocean Information Services … just about 1m currently)
  2. Installation of calm buoy is the most critical item. Will require 4weeks. Mgmt guided Jan production start (sounds optimistic)
  3. FSO has started form Singapore (can be verified) so that’s a good sign.
  4. Expect $5/mmbtu for B-80 gas and slight discount to Brent for Oil
  5. Exit volume for FY22 will be 7,000 boepd (includes O&G)
  6. Net cash to the company = 25-30Cr (math checks out) so say 300-350Cr CF/yr
  7. Total cost overrun of about 100Cr so far (not egregious if you’re getting so much CF)
  8. They’ll claim 70-80Cr depreciation/depletion so expect 250-300Cr Net Income. They have NOLs (not exactly but same idea) of 700-800Cr so no taxes for 2-3 years
  9. Timing: Gas sale can start immediately (Jan). Oil will be stored for 2 mo and then sold starting March
  10. How to track the progress from now on
    a. The company will likely issue an update (with another investor call) post B-80 completion
    b. Hiring. They need to increase bench capacity if they’re to grow. Track postings
    c. Weather and Prem-pride movement
  11. Next up after this is Dirok expansion (they’ll need to add mgmt depth as mentioned before) followed by PY-1 revival (govt looking to clear dues before granting extension, which currently expires in 2022. So expect cash outflow for that. Unclear how much.)

If, and it’s still a big if, all goes well we’re looking at 350-400Cr net CF for the 22-25 and likely higher thereafter. Field’s 2P is large enough to support decade+ of cashflows. This thing trades at EV of 2,800Cr. So not a bad bet still

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Vessel Prem Pride(FSO) has reached near the B80 Oil Field ( Source - Marine Traffic)

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Not sure if this link has been shared here on PY III Field (21% stake held by HOEC)

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https://www.upstreamonline.com/exclusive/singapore-player-in-pole-position-for-prized-indian-east-coast-fpso-contract/2-1-1073360

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Not sure if they still own this one. Their website or earning presentation doesn’t have a mention of PY3.

Found an old article.

Disc: Invested

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Hoec still owns 21 % stake in PY-3, however the field is non producing for long. HOEC did try to buy Hardy’s stake and even came to an agreement, but invenire energy paid double the money and acquired hardy’s Indian operations thereby raising invenire energy’s stake to 39%. Now the operatorship of the project lies with Invenire energy.

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Any idea at what valuation Invenire energy bought the additional stake

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@Jose Thanks for the details. I wasn’t aware of that.

@MrKing875 I see some articles on net which give some insight into it.

https://www.business-standard.com/article/companies/pe-backed-invenire-energy-acquires-uk-s-hardy-oil-and-gas-for-22-million-119102000757_1.html

Regards,
Raj

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Disclosure made by company in July 2019

The Company had entered into a conditional agreement with Hardy Oil and Gas PLC (“Hardy”), a
company listed in London, to acquire the entire share capital of HEPI, a company incorporated in the
State of Delaware having an Indian Project Office, for a cash consideration of US$ 1,500,000.
HEPI holds Participating Interest in certain oil and gas blocks in India viz, Blocks PY-3, CY-OS /2 and
GS-OSN. The Company holds 21% Participating Interest in Block PY-3 and considering the
opportunity to achieve an operating synergy the above transaction was contemplated.
The completion of transaction was conditional upon Hardy obtaining the approval of its shareholders
and other regulatory approvals on or before the Longstop date of September 30, 2019.
However, subsequent to the offer made by the Company, it came to our knowledge that Hardy
received an unsolicited offer of a significantly higher consideration of US$ 8,750,000 from another
Indian company - Invenire Energy Private Limited (Invenire) to acquire HEPI.
Pursuant to the offer made by Invenire, Hardy entered into a second conditional share purchase
agreement with Invenire despite the initial agreement entered with the Company, and thereafter
the Board of Hardy unanimously decided to proceed with the sale of HEPI to Invenire.

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Hi Guys , just need assistance over here , what will be the daily revenue here ,as per the volume and price , anybody can help , thanks in advance

Whats the formula for converting MMSCMD to MMBTU

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In yesterday’s conference call Mr. Elango has explained everything.
12 million cubic feet(the gas left for auction after internal consumption) = 0.3 million cubic meter.
Let’s see the average gas price is $80 for last month and the buyer gives a premium of 1%. Then the Gas price = (12+1)% * 80 = 13% * 80 = 10.4$/MMBTU and the minimum price is set to $6.

1 MMBtu = 28.263682 m3 of natural gas

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Then you have to remove government share and operating cost. That will give HOEC gas revenue from B80. This is just indicative figure.

Disc: Invested

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Thanks a lot , sorry for my ignorance , but how did you get 10614 mmbtu from .30 mmscmd , what’s the conversion formula for it.

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1 MMBTU = 28.36263882 cubic meters of gas
0.30 MMSCMD = 0.30 * 1 Million cubic meters = 300,000 Cubic meters
MMBTU/Day = 300,000/28.36263882 = 10,614.25

Hope this clarifies.

Regards,
Raj

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