Hindustan Oil Exploration Company (HOEC), India's first private oil and gas company, has stunned market observers with its performance of late. Despite other oil and gas firms struggling, there has been a sharp surge in the counter to Rs 90 in August from Rs 30 in March.
Considering the un-remunerative gas prices in India and internationally, the stock has piqued the interests of observers, with a number of theories doing the rounds in trade circles.
Fundamentally, the parameters that are usually used for such a purpose indicate the company is not on a strong footing.
The return to shareholders has been dismal – the last dividend was declared in 2010-11 while the company has an unpredictable bottomline.
For instance in Q3 FY20, the profit declared was up notionally by Rs 22 crore but the gains were not due to any operational expertise or rise in production but on account of reversal of invoices of ENI (Italian major) from 2010 to 2014.
Operationally, the company has a portfolio of 10 assets, most of which are non-functional. Gross production from the functional assets stood at 2,118 barrels of oil in Q1 FY21.
The management has been claiming for more than three years that it will begin production from its B-80 field. But there have been several false starts and it is likely that the production target will be rolled over to January 2021.
HOEC is also grappling with liabilities of over Rs 600 crore. On top of that, if demand notices from the government on royalty payments and liquidated damages are to be relied upon, the net liabilities of HOEC are close to Rs 780 crore as on March 31. To discharge these liabilities using cash from operations, it may take the company nearly 12 years to achieve.
On the liabilities front, HOEC Managing Director P Elango in an interview to CNBC-TV18 earlier this month said at no point of time it will be a negative net worth company.
"Let us look at the facts and the breakup of HOEC as on March 31. Our current liability is Rs 214 crore against a cash balance of Rs 171 crore. Non-current liabilities is Rs 142 crore, of which Rs 107 crore is for provision for site restoration.
"In the oil and gas industry, calculating the contingent liability involves a complex process. A lot of issues crop up and we have a very well established system to resolve them with the government either through policy or through a dispute resolution mechanism. Our contingent liability works out to Rs 244 crore. Of that, Rs 173 crore is towards service tax," he told the channel.
HOEC has tried to reassure investors by informing it has engaged well-known drilling and other service providers such as Shelf, Lamprell, Baker Hughes, Dril-Quip, Expro, Zentech, Shipping Corporation of India and Tide Water.
However, what the company has not told the investor community is that there are payment arrears worth $20 million to these vendors (some of whom have already taken legal recourse, including arbitration). This would surely be a pain point for the company and it could potentially push back the start date of the B-80 field.
It is perplexing to see the run-up in the stock despite all these negative cues. The management, it seems, has tried to gloss over all these factors and tried to present a hunky-dory picture.
It remains to be seen how long the company can sustain this dream run on the bourses given the tricky financial issues it faces.
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