Jindal Drilling - Beneficiary of a sustained offshore upcycle?

[Ravi.0104]

hello everyone.

While going through annual report for FY 24 i came across below

I have below queries. requesting members to please help in understanding these details.

1. The net asset mentioned are only 49% asset of JV.(Attributable to Companies shareholding?
2. If so, it means 49% of rigs is valued around 200Cr . hence complete RIG book value may be around 400Cr. This seems pretty low. (Jindal is paying 650Cr for 51% of Rig. How come its own share is only worth 200Cr). What am i missing?
3. Profit from Virtue Joint venture for FY24 is only 5.4Cr (I understand its only for 2 Quarter). Still it seems pretty low (2.7Cr/Q). So if Jindal will buyout Virtue, it may only add 10Cr annually?
   4)Is there any source to go through reports of JV in more details?
   Disclosure: Invested

[nirvana_laha]

@Ravi.0104

If so, it means 49% of rigs is valued around 200Cr . hence complete RIG book value may be around 400Cr. This seems pretty low. (Jindal is paying 650Cr for 51% of Rig. How come its own share is only worth 200Cr). What am i missing?

Jindal Drilling is not purchasing the 51% remaining stake in the JV. It is purchasing the asset owned by the JV outright for USD 75mn (Jindal Pioneer). So Jindal Pioneer as a whole is valued at 75mn USD (INR 630 Cr). Considering that this is a rig built in 2013, a 75mn USD valuation sounds very fair (Considering new build rigs are costing 250-275mn USD).

Once JV is paid this 75mn USD by Jindal Drilling, it will pay back 30mn USD loans that it owes to Jindal Drilling. So the net cash outflow for this purchase for the company will only be USD 45mn (INR 380Cr)

Also, once purchased, Jindal Pioneer will add INR 100Cr EBITDA and cash flows to Jindal Drilling’s P&L and balance sheet as per the current contract in Mexico.

Currently, since the Discovery JV is not consolidated in Jindal Drilling’s financials, the Jindal Pioneer asset does not contribute any EBITDA to Jindal Drilling. At a PAT level it contributes between 8-10Cr INR per quarter right now. Post asset purchase, this should double to 16-20Cr INR per quarter.

This purchase is financed completely by internal cash flows. For a net cash payout of INR 380 Cr, the company recovers ~INR 100 Cr cash each year from the asset’s operations. These terms for purchase seem to be as good as minority shareholders could have hoped for.

[Ravi.0104]

Thanks a lot for the response.
If JV is paid 75 mil for Rig, wouldn’t Jindal receive half of sale proceed being 49% owner?
I thought 75M is for the 51% ownership of rig.
Sorry if these seems immature questions

[nirvana_laha]

Post the transaction, the JV’s books will likely have 400Cr equity and 400Cr assets (of which 340Cr approx should be cash).

Jindal will have 49% share of the balance sheet of the JV. I don’t think the JV owns any assets apart from Pioneer. If the JV is wound up, then Jindal’s share of cash will come back to it.

[ganesh_bastwadkar]

great understanding.

[ar9abn]

Sandeep (@_Sandeep09) on X

[dark_hunter]

Although on absolute amount 1.4Million bpd sounds huge, however in terms of percentage wise its between 1-2%
Even if you see in the below picture there is a deficit in Q3 2025,

this supply/deficit of +/- 2% is very common in fact 75-80% time this is the case throughout history,

but sometimes oil glut could spiral in to something big, ex 2014-16 cycle, which made $100 to $30 , however these are uncommon phenomenon, and driven external macro factors, as It has been reiterated in many of the previous post, as long as the crude doesn’t fluctuate much and stays above $65, it shouldn’t; post much of a threat.

[Folok]

Hi All. While researching I came across a lot of insightful analysis on this thread. Here’s a quick summary of the broader picture with my own pointers:

The Sectoral Play

1. The E&P (upstream) segment of Oil & Gas industry seems to be in a middle of an upcycle. In India, the 10th round Open Acreage License Policy (OALP) (expectantly bigger than previous ones) and coupled with the country’s target of acheiving 20% natural gas in the energy mix by 2030 augurs high investments in the E&P space. Plus within the E&P space, >40% of spends in Offshore consists of drilling and well services which bids well for the Co.

2. In addition, the sector is facing a tight supply of various rigs (drilling, jackups and workover). With a low orderbook to fleet ratio, many rigs well past their technical prime (>20-30 years) and ROIC not justifying investments in new assets, supply is expected to remain tight in the medium term. This may push charter hire rates higher.

3. A reasonable likelihood of global oil prices sustaining at USD 65-85 in the near term.

The Play on Jindal Industries

The bet is on following near-term upsides:

1. Supreme’s new 2xd day hire rates which kicked of in Oct’24 + expected upward reneg on Explorer’s day rates post contract end in May’25 (new rates to kick off by Sept’25) + potential acquisition of Pioneer from JV would entail higher EBITDA (not 2x though as Jindal does not bear O&M cost now but have do so post acquisition)

2. All of the above against capex of ~200 Cr on Supreme which will be ammortized in P&L via term loan payment of 16-18 Crs for the next 3 years + repair and refurbishment costs and a quarter worth’s of time once contract for Explorer ends on May’25 + trached payment of $45 mil (~378 Crs) on a net basis post loan set off with JV for Pioneer’s acquisition.

In the medium term:

Post H1 26: Contracts for Virtue and Star may be reneged at higher prices.

Risks: What may sink the Bet

1. Oil prices falling down from a cliff. For reasons such as Donald Trump, higher fracking activities, OPEC witholding production cuts, COVID like crisis, fall in global demand etc. This is a serious risk and not just a formality. History has shown many a fortunes of individuals and institutions have drowned in oil.

2. Major players stagnating spends on E&P activities due to uneconomic oil prices (point 1) or their own financial difficulties. The whale in the sea is definitely ONGC in this case, as Jindal’s orderbook and future outlook is fully committed to them (super high concentration risk). Decreased/delayed spends can lead to revenue risk and lower asset utilisation for Jindal Drilling.

3. Jindal is a decently capitalized company but has a contingent liability of ~160 Crs agisnt ONGC pending final order from Supreme Court (Refer page 1, para 5 of Crisil’s Credit rating report dated July 1, 2024). 50% of this contingent amount (~80 Cr) is held as FD by the Company in anticipation of the final order. In addition, intercorporate loans and advances are a key monitorable. As of FY24, loans, advances and receivables to subsidiary and JV Cos consisted of 463 Crs of RPTs.

4. Although, the company has been in the business for 35 years, it still faces an execution risk in terms of renewing contracts, fulfilling contract obligations with ONGC and repairing and refurbishment within stipulated time and costs. In addition, high working capital days (~4 months) which is intrinsic to the industry is a key monitorable as well.

Valuation

At projected earnings of 180-200 Cr, against a ~2200 Cr market cap (as of 25th Dec’24) Jindal Drilling would trade a forward PE of ~12x which looks reasonable.

Also a major portion of the loans would be paid off in the next couple of years (read: borrowing foot notes in AR FY24) and some intercorporate loans and advances would be extinguished (such as post Pioneer acquisition). This low indebtedness would impute a gradually increasing ROCE which may over and above justify a 12x forward PE.

Disclaimer: I am invested in the company. This does not construe this as an investment advice.

[dark_hunter]

Dhruv Rawani (@dhruvrrawani) on X

Growth phase starting??

[Hemant_Kumar2]

This is where domain knowledge plays a key factor to make sense of these announcements. Average decline of an oil and gas field tends to be around 7% (for some companies it’s more and for some it’s less). So oil and gas companies have to keep drilling wells to just maintain production which doesn’t mean they are entering growth phase.
If a company has 1000 wells and their decline rate is 7% then roughly they need to keep drilling 70 wells every year to just replenish production. So one should ask Oil India management about their average field decline, current number of wells, their productivity and other initiatives to improve productivity to make an informed call on whether they are looking to increase production or just replenishing what they are losing every year.
Of course management will never go into all such details as they need to keep the market excited.

[dark_hunter]

@Hemant_Kumar2

So one should ask Oil India management about their average field decline,

I think you missed to read the whole thing (screenshot), they clearly mentioned, 6% net growth
(12% decline 18% gross growth)

Besides in respect to this company, only thing that matters is how many of jindal drilling’s new rigs are to gonna online, utilisation level and incremental revenue they are gonna generate from newer contracts, how long they can sustain this, that’s all matters mostly/broadly.

[jay_jariwala123]

Completely agree, best time to bet when new rigs gets deployed at higher rates than pervious one.

Disc: Invested.

[dark_hunter]

This below post is for my notes

TLDR;

Barring the extreme events, it’s is highly certain that they might do 700 crore top line this financial year, 770 in fy26 with margin is getting back to old levels due to better absorption of fixed cost(this fy rigs were under maintainance), post fy26 both top and and bottom line most probably improve from renewed contracts

All we need to know is in below screenshots:

2 of them will be renewed at high rates after fy26

In my opinion, every investment has some level of uncertainty, that being said, given high probable nature of this thesis being played out, in this current exuberant market environment finding such a company with this level of growth prospect is really really rare. No fancy mumbo jumbo story, just plain earning visibility with the reasonable predictability on the growth rate

The only thing we should aware of deeply is exit multiple or exit Mcap

Disclaimer: Invested ( what a find, thank for your hard-work @nirvana_laha and sharing it with us)

[jay_jariwala123]

Hi @dark_hunter ,
Opportunity is quite good but there are some anti-thesis as well.

1. Depreciation will be added from next quarter as refurbishment cost. (need to see how much revenue will contribute to PAT)

2. Jindal Explorer revenue will stop flowing into top line from q4fy25 (although small but can put some impart on bottom line as well)

Key trigger to notice is whether jindal Explorer will be operated at higher revenue rates or will stay ideal until they gets order from ONGC or will this rigs will ship internationally and will operate there.

Disc: Invested. Nothing is B/S recommendation

[dark_hunter]

Well both the points are not anti-thesis, depreciation point is just part and parcel (It’s 140-180 crores as I presume from their concall), it will be spreaded over 10 quarters or more (until the contract of the given rig), so the impact shouldn’t be significant,

@jay_jariwala123

Key trigger to notice is whether jindal Explorer will be operated at higher revenue rates or will stay ideal until they gets order from ONGC or will this rigs will ship internationally and will operate there.

In the concall they had mentioned, if not with ONGC, they can always ship to internationally, this doesn’t seem to be a problem, according to them, ONGC, were keen to bring back their older rigs too, so this shouldn’t be problem, may be temporary delay might there that’s all

Reading Q2FY25 Concall is a must, the only key thing, I am not able to have is ball park Exit PE multiple, I checked for international offshore drilling players, its widely fluctuation, most of them re negative, some of them inn 100’s due to muted earnings, median is at 7 , so that’s the only problem I have,
but this is a industry where the unit economics have become favourable after a long time.

But one need to closely watch out for exits post Fy26, after the rig’s day rate increase, I don’t see any upside after that, because you can’t keep on increasing rig rate, it won’t be viable too, so in short this investment definitely has a expiry date, or Peak Mcap, the question is what is that MCap, if we are able to derive that, we can have the exit time horizon,
Given the fact markets are forward looking creature, I presume we should hit our peak MCap around Q1-Q2FY27.

Disclaimer: Invested (Contemplating on capital allocation, may be will use the Fortune formula also know as kelly formula)

[jay_jariwala123]

Yes I agree that depreciation is just book keeping term but that should be taken in consideration before giving valuation to such company which have contract based bussiness(Rented/Lease/Operated).

2nd point is definetly an anti-thesis because shipping rigs to operate internationally will take atleast 1-2 quarter post getting deployment order. If any asset is being ideal on balance sheet for a significant amount of time then markets will value the company accordingly as seen in past.

Disc: Invested. Nothing is B/S recommendation

[Folok]

Westwood’s group prediction for the Offshore drilling industry. Short summary:

1. Offshore drilling upcycle to continue but 2025 will be a year of market correction
2. Postponed projects will soften demand globally but growth is expected in areas such as Latin America, Africa & India.
3. Among the types of drilling rigs, semi-subs will be the hardest hit as they fall out of favor against drilling ships. At the end of 2024, 6 ships have been retired and no new ships delivered thus decreasing the overall supply.
4. All 6 rigs of Jindal are jackup fleets so comparitively lesser demand stress.
5. Dayrates are expected to witness some softness. However, day rates for jackups and drilling ships are expected to be maintained at the 2024 average.

For more details, read the article:

Westwood Insight – Offshore drilling upcycle continues, but 2025 will be a...

[Folok]

This is a macro blow. Biden just permanently banned oil and drilling across 625 million acres of US coastal territory.

However this happened 6 days ago. So the impact is well priced in the markets. From what I understand existing contracts are operational but prospects for new contracts are prohibitive. This is supposed to cause a surge in oil price in the medium term; with depleting supply from existing oil wells not being replaced with fresh ones.

Expect volatility in near term. As long as oil prices are higher than $60 concerns should be broadly limited.

https://www.commondreams.org/news/joe-biden-offshore-drilling

[Swadesh9819]

Biden is hear to stay for 6 more days.

Trump is favourable to O&G exploration. Middle east is on rampant expansion in explorations and productions. Indian government is also supporting O&G E&P.

There might short term blip but medium term lloks favourable.

[nirvana_laha]

Jindal Drilling. 100% YoY and QoQ PAT growth on consol basis.

This is with Supreme not operating for the full Quarter. Also the Jindal Pioneer buy transaction is still pending, which should happen soon. Once that happens, 9-10Cr per quarter should get added to the bottomline.