Hindustan Oil Exploration Company Limited (500186) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Conference Call of Hindustan Oil Exploration Company Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of HOEC or Hindustan Oil Exploration Limited (sic) [ Hindustan Oil Exploration Company Limited ]. On behalf of the company, I would like to thank you all for participating in the company's third quarter and 9 months ended of financial year 2021 earnings conference call. Before we begin, I would like to mention a short cautionary statement as mandatory. Some of the statements made in today's earnings conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. I would now like to introduce you to the management participating with us in today's earnings call. We have with us, Mr. P. Elango, Managing Director; and Mr. R. Jeevanandam, Executive Director and Chief Financial Officer. Without much delay, I request Mr. P. Elango, to give his opening remarks. Thank you, and over to you, sir.

Thank you, Anuj. Good morning, everyone. Happy to connect with you all on this Q3 FY '21 earnings call. R. Jeevanandam, our CFO and Whole Time Director is with me, and Valorem Advisors, our Investor Relations advisers, are also on the call. I hope you all have received our updated earnings presentation. We've also uploaded that on our website for your reference. I'm sure you all have noticed that oil prices have touched sweet $60 yesterday. Prices have been steadily rising. Global oil analysts expect this trend to continue during 2021 and '22. In India, vaccine launch has turned the corner and outlook for economic recovery is positive. However, challenge to executing projects on the ground still remains and incorporating strict COVID-19 protocols is critical to manage operations and to execute projects. With this in mind, we have kept our production operations continuing safely. With lean teams at all our operating sites, our first priority has been to ensure safety of our personnel and the facility. In Dirok, we continue to maintain the high production levels achieved earlier in the year. We are now confident of producing at these levels on a consistent basis. The average production of gas from Dirok in Q3 FY '21 was 39 million standard cubic feet per day. Performance of Dirok reservoir has been very promising. Our endeavor has been to deliver more using the existing infrastructure. Towards this, we have been using the 4-inch COPU line and process facility of Oil India at Kusijan to meet additional demand in excess of our planned capacity of 36 million standard cubic feet per day or 1 million standard cubic meters per day. Our biggest hurdle to better value creation in Northeast has been the low gas prices at $1.79 per MMBtu. Prices since October 2020 has been the lowest ever, hitting our revenues badly despite good volumes. To discover better prices from the market, we are preparing to launch e-bidding for Dirok gas as per the Government of India's guidelines on the e-bidding process. We are encouraging major consumers in the region, including Oil India and IOC, to participate in this bidding. We are in consultation with our JV partners to launch it in this quarter and to discover a new premium price over the government-notified prices, that will be effective from 1st April 2021. Depending on the response, our target is to have new sales agreements in Q1 of FY '22. The current arrangement will continue with Oil India to ensure smooth transition using the pipeline infrastructure of Oil India. In PY-1 offshore field, inconsistent offtake earlier had adversely impacted the performance of our wells. This situation continues with the declined production from the wells. To improve production, rig-based well intervention in the form of workover of existing wells and/or drilling of new wells will be required. Geological studies have been completed to plan the next drilling campaign in this unique fractured basement reservoir. Application for environmental clearance has been filed. Plan is to commence drilling in PY-1 after first oil from B-80. Our current focus is on executing the installation project in Western offshore B-80 for first oil before the current West Coast weather window ends. In the context of pandemic-induced supply disruptions, procuring project material to meet our schedules had been a big challenge. We had embarked on a global search to source items from inventory. All physical items have now been procured from various parts of the world. Flexible pipelines are being picked up from U.S.A. and U.K. and are in transit to the location. Calm buoy has been sourced from Batam and is now undergoing final refurbishment in India. MOPU works have been completed and class certificates have been obtained to move it from Sharjah to Mumbai. Contract of installation of gas export into ONGC's line have been finalized. For evacuation of oil FSO, Prem Pride is purchased by our group company Hindage Oilfield Services and is getting ready for drydocking at Singapore to meet the project schedule. We had hoped to commence the installation works in February 2021 but logistical delays have pushed it to March. We are still facing visa-related challenges to mobilize domain experts from different parts of the world. We are now fully geared up to commence the installation works in March to complete it before monsoon. Overall, we are confident to find alternative solutions to complete the project and deliver first oil and gas during Q1 FY '22. On the marketing front, we would soon be launching the e-bidding process, targeting gas consumers and aggregators in Gujarat. And for oil, we have initiated preliminary discussions with the refinery. I now invite Jeevanandam to take you through the financials.

Thanks, Elango. We report that the company made a revenue of INR 24 crores in the current quarter against INR 30 crores in the previous quarter. In the consol accounts, it is INR 28 crores against INR 33 crores in the previous quarter. Volume of oil and gas is almost similar. And the reduction in revenue is mainly from reduction in prices of Assam gas from $2.64 to $1.98 in the current quarter, which is about 25% reduction, and the same is reflected in the reduction of revenue. This quarter profit on stand-alone is INR 7.8 crores against INR 10.33 crores in the previous quarter. In the consol accounts, the profit after tax for this quarter is INR 8.44 crores against INR 11.7 crores in the previous quarter. Total expenses of standalone is INR 19 crores comparing INR 23 crores in the previous quarter. Operating costs are not linear to the production, except statutory levies such as royalty and cess which is ad valorem. In the consolidated accounts, it is INR 22.58 crores (sic) [ INR 22.57 crores ] comparing INR 24.42 crores in the previous quarter. Operating cash flow stand-alone for this quarter is INR 13 crores comparing INR 10 crores in the previous quarter. In the consol accounts, the operating cash flow stands at INR 14 crores. The company's stand-alone cash and cash equivalent is about INR 121 crores as on 31st December and the consol accounts, the cash equivalent is INR 141 crores. In case of B-80 development, offshore installation processing unit is ready to move to B-80 field. FSO which is an aframax oil tanker is to be dry docked while the single-point mooring being refurbished at an Indian yard. Whole system is expected to be ready for installation before the end of this financial year. These facilities are resourced through our own subsidiaries with a borrowed capital of about INR 85 crores and about INR 38 crores are yet to be drawn to meet the cost towards the SPM and its installation. These assets such as offshore installation, which being a self-elevating unit and FSO being an aframax tanker are movable assets and will add substantial value to service business of the subsidiaries during and after the captive use in B-80 field. We have secured a loan facility of INR 150 crores from Vyoman to meet the capital cost towards additional 10% participating interest in the block. We have undrawn facility of INR 100 crores to meet the funding needs of the B-80. We are confident that we'll meet our obligations and B-80 would be on revenue mode in the ensuing financial year. All our subsidiaries will be on the revenue mode with the production from B-80. With this, we will embark on an unended overall growth of B-80 assets of HOEC as well as the oil field services of our subsidiaries. We have prepayment provisions for our loans, and we'll ensure that your company is again debt-free within 12 to 18 months of production from B-80. Thank you.

Thank you, Jeeva. Anuj, we can open the floor for questions.

[Operator Instructions] The first question is from the line of Riddhesh Gandhi from Discovery Capital.

I just wanted to get an understanding of any risks which are there with regards to us being able to actually commercialize the B-80 before the rains start. And any other contingency risks longer-term in the execution, which could happen?

Riddhesh, now that we have managed to source all the project material, and as I explained, mobilizing them and all the materials were derived by end February, first week of March, to ensure that we commence the installation in first week of March. So as we had earlier estimated, the total installation time could be, depending on weather, it can be completed in 45 days to 60 days time. Therefore, with all the mobilization that is being now fully committed, we are confident we will be able to complete it before this season. Exact date of completion is really determined by how the weather would behave. And depending on that, the number of days to make the completion will vary. But otherwise, we are confident that we will complete it in this weather window.

The next question is from the line of Varatharajan from Systematix.

Sir, 2, 3 questions, sir. One, on the -- can you please elaborate on that 10% additional stake that the [Audio Gap]? Secondly, I wanted you to elaborate on the PY-1 situation and like, how we can actually look at the production going forward? And what kind of a CapEx one is looking at in terms of additional drilling? And three, of course, like, if there is some visibility on PY-3? And finally, the crude quality in B-80, what should we use as a benchmark? Should we use as a Brent minus something or some other benchmark?

Okay. Thank you, Varatha. On the first question of additional acquisition of 10% from our JV partners, as we announced, this transaction between the partners have been completed. And right now, we have sought the final approval from Government of India. It has been cleared at the DGH level and it's gone for a final approval by the government, which we expect to receive over the next few weeks time. So that completes the acquisition, and we would then have a formally 60% stake in the project. As we had outlined earlier, under this arrangement, we will carry our partner till first oil. Once the first oil commences, and the -- from that point onwards, all the operating expenses would be shared at the ratio of 60% and 40%. That's on the additional 10%. We'll also be using this fund to own the MOPU on a 100% basis. That will be owned by one of our group subsidiary company, fully owned subsidiary company. That is on the B-80 part. On PY-1, what we have experienced is that due to a prolonged shutdown in consumers and inconsistent offtake from the wells, the wells have declined. And this will require mobilizing a rig to build new wells in the region. We have completed all the geological studies and identified the location. We've got an FDP approved by the government for drilling 2 to 3 wells. And our plan is to now complete the B-80. And after we get the environmental clearance and all other approvals, take up the drilling in PY-1. Exact time lines, we have not yet firmed up. Our effort is now to execute B-80. On the quality of crude, we've got the detailed analysis. We will be sharing with the refineries. And maybe in the next call, we'll be able to give you some idea about the prices that we can secure. On PY-3, the operator is making effort. Right now, we don't have any clear plans on when the production will commence from PY-3.

One final question on the debt cost, sir. What is the kind of debt cost we're looking at?

The debt is -- on overall cost is 12% per annum.

The next question is from the line of Rishabh Tambi from HDFC.

Sir, this is Rishabh here. So I need to understand the update on Kharsang field, are we on track for quarter 2 FY '22. Also on the Kherem, what is the update on the Kherem field?

Yes. Rishabh, on Kharsang, right now, the final clearances of forest and clearances for the next campaign is still outstanding. And as well as the government has extended the PSC for a shorter duration, pending resolution of certain past recovery issues as such. So once those issues are resolved, the further investment and drilling in Kharsang will take place. Right now, the field is producing around 600 barrels of gross production a day. And with the oil prices strengthening, the revenue from the field will also -- will be better. Otherwise, the ongoing production is going on. The next part of drilling campaign would happen after the PSC gets a full term extension, which in principle agreed by the government, they are waiting on certain past recovery issues to be resolved with the operator. On Kherem...

Just FDP is pending, right? Why is FDP pending, not the forest clearance and mining leases? The company has already received that, right?

Mining -- revised -- extended PSC term is pending. The PSC has been extended on an ad hoc basis. And on Kherem, once again, the forest clearance is pending. And pending -- after that only the PML will be issued. The issue in Arunachal Pradesh government is they would not issue mining leases without the forest clearance being pre-issued. And that is -- that -- on this matter, the DGH is also following up with the state government, but it's still not been secured.

Okay. Sir, any update from the Cambay basin, what you're looking at R2 area and all with CB-ON-7?

Yes. On the R2 area, the final PSC execution is, I should say, advanced stages, it's been delayed for quite some time. Recently, there was a meeting held by the ministry to clear that. Once that PSC is executed, which we hope it will happen in the -- hopefully, in this quarter, because it has got a push from the government as well now. In anticipation of that, we've got the field development plan approved for our other field, North Balol and Asjol in Cambay, and we have filed environmental application and commenced EIA study for filing to a secure environmental clearance, preparing ourselves for the drilling campaign in Cambay basin, combining all the 3 fields.

The next question is from the line of Hardik Jain from White Stone Financial Advisors.

Sir, regarding PY-1, as you mentioned, because of erratic offtake from the customer, the well has become less efficient. So is there any risk of writing off any expenses in PY-1 because we had to do some -- this kind of write-off earlier with R1 of the well?

We have already to the bone on it, and we don't have much to write-off in this because we are keeping only the minimum asset value there, which has been always evaluated on every annual basis. And we don't plan any impairment of those reserves. The underlying reserves remain the same. And we don't expect any impairment in the current financial year.

So what would be the asset value that we have on the balance sheet for PY-1?

It's about the CapEx -- it is including total value put together is about less than $12 million.

Okay. Okay. And sir, [Audio Gap] of Northeast, the price has reduced from $2.64 to $1.98. So this is due to -- I think this is due to the government mechanism of price discovery, is it? Or this is the market linked price?

This is the price fixed by the government because they've put a sophisticated formula for basing, one is on the National Balancing Point, another is on the Henry Hub and another is Alberta and another is Russian. Now these prices complement with price of the lowest one of $1.68. And now with the current trend, if you look at -- even with this, we will be able to have a better price from the 1st April onwards. So this will vary on every 6 months as of the current mode. Unless we get a marketing freedom and where the gas can be sold at the exchange or something.

And you mentioned something about launching some bidding mechanism for new clients and terms with IOC will remain as it is. So can you just elaborate on this?

Yes. What we plan to do is -- as you know, currently, whatever is the total gas production from Dirok is being sold to Oil India, who is also our partner in the venture, right? So they buy the gas from us and distribute it along with their -- to their customers, mixing it with their gas. What we have been -- and Oil India is allowed to sell the gas only at government notified prices. So what we have -- with the new policy that has been rolled out by the government, we have the marketing freedom for Dirok gas, but it can only be currently sold within the Northeast region with limited infrastructure. So what we have persuaded Oil India and our partners is to launch this e-bidding process to discover what could be the market prices within the existing customers as such. We do expect some amount of premium, but it will not be like Gujarat or so. So that exercise, we are hoping to launch in March itself to discover the new price. Now if the prices are -- come out to be better and the customers are reliable customers, we will migrate into that regime. As a backup, we already have an ongoing contractual arrangement with Oil India, which will continue. The whole idea is, if not the entire volume, at least part of the volume, we will put it in the market with the support of Oil India because their infrastructure will be required to sell it directly to the customer. And so they've also -- we are in discussion with them. And the government mandate is also clear to discover gas prices through this process only. So we would be launching that. And depending on the outcome, we would take the call.

The next question is from the line of Tejas Shah from Unique Stock Broking.

I think we had a cash of around INR 150-odd crores on our books, if I'm not wrong. Then why do we need to take additional loan of around INR 250 crores?

This is a cash balance in the company, which is in the order of INR 141 crores at the moment. But we are having a capital program, which comes on it, which is going to create -- there are 2 set of assets are there. You have to look at 3 set of assets. We increased our participating interest from 50% to 60%. There is a 10% capital outlay, which goes about some, say, INR 70 crores, INR 80 crores, which goes out from there. Then you've got a Mobile Offshore Processing Unit, which is more than INR 175 crores. Then you have got about aframax tanker and SPM installation, which is about INR 150 crore. Of the INR 400 crore capital outlay which we have got in place right now, for that, we are securing only INR 150 crore cash. And you cannot run an oil and gas company without cash in hand. That is the reason we are having the capital. You cannot be on to the bone on every time. That's the reason we have had adequate cash. We intend to have minimum cash, at least INR 100 crores on hand on every quarter. That's the reason we have got this loan. Because we are getting at 12%. We are getting reinvested back at 6%. The net exposure to is only 6% per annum to us.

Any plans of capital raising then?

No plan of capital raising, and we have no plan to any equity dilution.

Okay. And if you can throw some light on B-80, now I think you're saying production should start from April. So in Indian rupees, what was the expected volume and profits from there? Now the oil prices have gone up, you were looking at $45 in the last con call average price. Now has the outlook changed to $55 to $60? And what would be the revenue or bottom line impact?

If you have a 12-month production there on to it, at $50 oil price, as a conservative, we will not go beyond even if it is $60. We'll take a price of $50, that is a benchmark for us. We'll be making a total revenue or the netback to us is about INR 300 crores. Out of that, the amount which is on the balance sheet, which will be on the P&L account should be INR 200 crores. 2 things, the production should be one, it is 2 kVA production and the second thing is the price. With this, we should be able to hit a target of INR 300 crores netback and the INR 200 crores profit on the P&L account.

The next question is from the line of Nirbhay Mahawar from N Square Capital.

Our MOPU was expected to move from Sharjah from December onwards, while it is -- while you have mentioned that it is ready, are we purposely delaying because of the other things and projects are getting delayed or...

Yes. Correct. What we thought was once you bring the -- we wanted to utilize the movement of all materials so that the project can commence without any unavoidable expenses because the moment you bring the MOPU here, you need to have a support vessel mechanism. We felt MOPU is safe there and a much lower cost to retain it there. Now that we have a specific dates on each of the project to vessels and material, we have got all the permissions required to move. We expect the MOPU to move if not today, tomorrow from Sharjah and it will arrive before other materials arrive. So this way, we'll be able to manage the support cost better.

Fair enough. Also on the gas pricing front, you mentioned that -- what would be the -- like if we assume current oil prices around $50, $55, what would be the gas pricing in the -- from April onwards, a rough range of?

No, it is. It is -- given then the full calculation, that it should be expected to be about $2 from the current $1.79 -- it should be about $2, but we have not done -- we don't have access to detailed calculation.

And we are expecting that in Dirok, we will be able to get premium over this $2 -- expected $2 if we go for this [Technical Difficulty]?

Correct. Our bidding process itself would be -- what is the potential customer is willing to pay as a premium over this price. That's how the bidding itself will be conducted. So we have covered our baseline. We will see how much volume we can clear with the reliable customers, what kind of a premium we can secure. That's the purpose of the...

Okay. And we are entitled to sell all of it if we have got enough demand from the customers? There is no volume cap like first 35 MMSCFD you need to...

No, there's no volume cap. We can.

The next question is from the line of [ Rohit ], an individual investor.

Sir, my first question is on the e-bidding process that you're doing in Assam, would it -- I mean, would it -- the whole process become quite -- much more simpler if, let's say, the IGX comes out with Duliajan as one of the hubs for exchange in India?

Correct, Rohit. In fact, we've been -- Hazira has been designated as one of the delivery point for online trading, Hazira in Gujarat. So for the B-80 gas, that presents a very good opportunity. As far as Northeast and Dirok, Assam gas, we've been suggesting Duliajan as a hub. This has not yet been designated. Maybe they have certain requirements for -- once a full-fledged Eastern Gas Grid gets commissioned, that is likely to be designated as a point. But we are not really waiting on that. We, in parallel, have discussed the matter with Oil India. And we are proposing Duliajan as a delivery -- physical delivery point to actual customers.

Understood. So that was helpful, sir. So the second question, just to clarify again, I think Jeeva sir said that for the 10% incremental stake in B-80, we paid INR 70 crores to INR 80 crores. And if that is correct, what is the -- I mean how have we valued this -- at what -- under what assumption have we decided this stake -- I mean, this valuation, if you could explain, that would be really helpful.

Actually, there is 2 ways looking at it, actually. From our side, we look at as a value perception. From the seller side, they look at a funds perception. When we looked at the total cost incurred by the company as such for that and the future work program, which we are going to incur there, we have looked at a cost-plus basis. That's the basis we valued the 10% participating in this, which is around INR 60 crores to INR 70 crores. So in a way that -- the partner is not going to -- partners cost, we are not going to look at any cash outflow from our side. We'll be putting this money into the block for funding the partner. That's where we have structured this transaction.

Understood, sir. That was helpful. And again, on the funding, I was just curious, I mean, I've been following this company for a while now, and we have a very strong balance sheet, and we have excellent management with great transparency. So I mean, is 12% the best rate that we could get? I would have assumed that you would have gotten much better rates. So any clarity on that front?

Actually, we were looking at more towards a very, very short term. We don't want to look at as a longer-term funding. Second thing, if I go to the bank, the minimum duration, it'll be minimum of 5 years. And 5 to 3 years. And here, I'm looking at as a very, very short term for me. And the moment, my B-80 comes on the cash flow more, whatever my surplus cash will go back to my repaying the loan. So it's very, very small period of funding as such. So that's the reason we looked at 12% as okay. And it is short funding and without any security it gets quicker to us, that's the reason we went to this mode.

Perfect. Yes, that makes sense. That was helpful. And when you mentioned that B-80 has a netback -- so netback is -- the net profit that we intended to accrue is our share of profit. Isn't that not what you were intending when you said?

No. Netback means without considering the depreciation and depletion.

But this is the cash that will come into the -- so 60% participating interest that we have, it is after all the expenditure including operating?

That's right. For 60% participating interest, the net cash accruing to the company as such.

Great. So one clarity here, sir, I mean, our participating interest is 60%, which would mean that roughly 60% of profits would come to us. But given that we are providing pretty much all the assets and that is on our books, and it will be on a rental basis, would I be right in assuming that the net cash flow on a whole project level basis would be actually much more? And INR 200 crore is just purely the profit from the sale of oil and gas? Or is it including that amount as well?

No, it is a stand-alone what I told you. The 2 subsidiary companies as an independent entity will be earning their own revenue. And they don't cost and their margins won't be substantially higher. Their capital, they will be making a return which is in the order of say, 20% to 30%. So that will reflect in the consol accounts.

Understood. So there will be additional cash also that will be accruing to the consolidated entity because of the renting of the assets to this project, right, basically?

That's right. And we have a small borrowing there on. That borrowing also, we would like to liquidate as quickly as we can. At the moment, we would like to keep of cost of capital around less than 7%. That's our idea. So we will try to work it through that.