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The ongoing market weakness has taken a toll on many stocks, especially in the mid- and small-cap category. But this presents a good buying opportunity in companies that are doing well and have good growth potential. Investors with a long-term perspective and high-risk appetite can buy the stock of Hindustan Oil Exploration Company (HOEC) that is proceeding quite well on its revival plan from August 2017.
The company’s profit nearly doubled in 2017-18 to ₹49 crore and has grown nearly eight-fold in the half-year ended September 2018 to ₹66 crore. The HOEC stock more than doubled from August 2017 to August 2018 but has since fallen about 20 per cent. At ₹132, it now trades at about 18 times its trailing 12-month earnings, compared with the average of 44 times over one year and 133 times over three years. While even the current valuation seems high compared to the stocks of ONGC and Oil India — much bigger hydrocarbon explorers — that trade at seven to eight times, historical valuation is not a good measure for stocks of companies in revival mode.
HOEC’s output and earnings are expected to increase sharply over the coming years. This should moderate valuations. That said, the stock is suitable only for those with a risk appetite, but exposures can be limited. HOEC is a micro-cap stock with market cap of about ₹1,700 crore. Besides, oil and gas exploration is inherently risky, with a propensity for negative surprises, regulatory troubles and delays.
Strong turnaround
For many years, HOEC was more or less grounded and its earnings were moribund. The company’s revival was triggered by management change and a ramp-up in gas production from its mainstay Dirok field in Assam. HOEC has 27 per cent stake and is the operator of the field; the partners are public sector majors, Indian Oil and Oil India. Output at the Dirok field has been increasing consistently over the past year.
The average gas production in the September 2018 quarter was 32.6 MMSCFD (million standard cubic feet per day), up from 23.1 mmscfd in the June 2018 quarter. Also, average condensate production in the September 2018 quarter was 792 bbld (barrels per day), up from 552 bbld in the June 2018 quarter. HOEC has recently submitted a revised plan of development for the next phase of Dirok. It has planned a campaign to develop four more wells to increase gas production to 55 mmscfd.
Also, the company has done well on its plans to boost output from its PY-1 gas field (100 per cent stake) off the Puducherry Coast. The field’s average gas production in the September 2018 quarter was 9.8 mmscfd, up from 2.35 mmscfd in the June 2018 quarter. The company has recently applied for production-sharing contract (PSC) extension for PY-1 for 10 years up to 2030 and submitted a revised field development plan to increase output. The existing facilities in Dirok and PY-1 can handle additional volumes with minimal capex.
Besides, HOEC has big plans for its offshore asset B-80 (50 per cent stake) near Mumbai and Kherem (40 per cent stake) in Arunachal Pradesh. These are discovered small field (DSF) blocks and carry lower risk. The company expects the B-80 block to commence production by June 2020 and contribute about Rs 100 crore to the bottom-line.
It is also looking to increase stake in the Kharsang block in Arunachal Pradesh from the current 30 per cent. Over the coming years, if things go as per plan, these assets can add tidily to the company’s profits. HOEC has also recently won a block in Assam under the OALP (Open Acreage Licensing Policy) auction. The company is seeking to establish operational synergies among its assets in the North East. It also intends to participate in bid rounds of OALP/DSF in the future.
Pricing benefit
It helps HOEC that oil and gas prices have been rising over the past year. The price of domestic gas has been increased to $3.36/mmbtu for the October 2018 to March 2019 period from $3.06 in the April -September 2018 period and $2.89 in the October 2017-March 2018 period.
While the revised price is low compared with prices of imported gas, HOEC still expects to make tidy profit, given that its operating cost for the field is quite low, thanks to its low-cost, fast-track development model. The condensate produce will fetch a Brent equivalent price.
HOEC has a debt-free balance sheet. The company is open to inorganic expansion in the future and could go for debt to fund such opportunities.
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