Hindustan Oil Exploration Company – stellar Q3, performance to improve

Ruchi Agrawal
Moneycontrol research

Hindustan Oil Exploration Company (HOEC) reported a stellar performance in Q3FY18 with revenues up 143 percent YoY and 59 percent over the last quarter. Amid a favorable price environment and a volume uptick, the same trickled down many folds to operating and net profitability. Earnings before interest tax and depreciation (EBITDA) was up 605 percent YoY and 79 percent sequentially. Operating margins improved 190 percent YoY.

The Assam block is now contributing significantly towards revenues and profitability and the company plans to improve volumes rapidly, and expects many fold increase in revenues and net profit in the upcoming quarters.

Production from Dirok ramping up

Dirok - Assam block has started contributing positively towards revenues. Production from the block was the major contributor in the turnaround of revenues for the company. The block now stands as the most important reserve for the company and major contributor to profitability. The block had started production since August 2017 and Q3FY18 was the first full production quarter. The current 4 inch pipeline is limiting the production currently and volumes are expected to increase further with the full commissioning of the modular gas plant and the 12 inch pipeline from April 2018 onwards.

The company saw almost a 60 percent increase in gas volumes during the quarter. With crude prices in an upward momentum, we expect the gas prices to follow suit, and with a six monthly revision structure for HOEC’s contracts, we see gas realizations to improve further.

HOEC has expressed interest in acquiring and exploring reserves around the Dirok block under the governments open acreage licensing policy. Positive outcome for the same could add further value to the Assam block in the long term.

PY1 commissioning on track
HOEC holds 100 percent stake in the PY1 block in the Cauvery basin and is on track for drilling and reentering two wells and enhancing production from the block. The contracts for the rigs and operations have already been signed and the drilling work is expected to begin from April 2018. The realizations from the incremental production are expected to start flowing in from July 2018, which would give another boost to revenues and profits and we expect another step of re-rating during this time. Moreover the total reserves in the basin are now believed to be much higher that initial projections which would work in favor of the company in the long term.

B80 following time line

The field development plan for the B80 basin in Mumbai High has been approved in December and the block execution is on track. The company expects to commence production from the block from April 2020 which would further add to revenues and profits for the company in the longer term.

Outlook

HOEC has a debt-free balance sheet and an immense scope to benefit from leveraging in future, providing capacity for inorganic as well as organic expansion. The company has an asset portfolio of discovered reserves in all blocks and a plan of systematically monetizing the resources, the company seems well positioned for future growth.

With carry-forward tax benefit, no finance cost liability, high percent margin profile, no/low profit-sharing with partners in the initial years of production and gas rates and crude oil price in an uptrend, a majority portion of revenue realizations would flow down to profitability.

The stocks has run up 98 percent in the last 12 months and 58 percent in the last quarter, post which it is trading at a 2019E PE of 20x. With a turnaround of revenues and profitability we see scope for a significant rerating for the stock in the upcoming quarters. With clear visibility of revenue and profit growth we see it as a growth stock. We recommend using any softness to build up position in this high growth business.

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