Jindal Drilling & Industries Limited (JINDRILL.NS) Earnings Call Transcript & Summary

The next question comes from the line of Saket Kapoor from Kapoor & Company.

Sir, as you were just answering to Udit bhai and you very well clarified that, that in the process of getting the right value for the assets, all the assets must be under -- you believe, people are trying to bring the asset under the company so that we can carve out the net asset value also and the annuity run rate also from the existing assets. So this is what you were trying to explain to the earlier participant?

No, sir, I was only talking about creation of value within Jindal Drilling, because we are already running the rigs which are rented. And the main part of rig operation is running the rig. So if we have been able to run the rigs for so many years successfully with the highest levels of efficiency, and we have necessary financial resources to acquire these rigs, then it is in our best interest to acquire these assets, which is what we want to do. At the same time, if we are able to get assets at a cheaper rate in other markets, then we are also open to acquire those, because the net cash position of INR 101 crores that we have right now, this will only improve going further, because all rigs are now deployed at higher rates, even the rigs which are owned by joint ventures, they are also deployed. Therefore, cash accrual in Jindal Drilling will increase. And that is the way we want to grow.

Sir, when we look at refurbishment cost, they are the highest whenever a rig is dehired. So if we take that parameter, what should be an ideal percentage which is to be spent on refurbishment, since one of the rigs will be dehired in the coming few months? And sir, the benefits of refurbishment, how do it -- whether it enhances the efficiency or only make the rig just in line to perform for the remaining period? It means, you have mentioned that [Foreign Language]

Sir, refurbishment is a major overhaul that takes place on the rigs. The reason why that is required is twofold. One, there are contract requirements that ONGC has, which is unique to each contract. Number two, for safety reasons, we have to ensure that all equipment is maintained and recertified. And the only way to decide if the equipment is safe to use is on recertification. When we go for recertification, since the recertifying agency has certain criteria, which has to be met. Therefore, we have to do whatever is required as per their criteria. And this process takes anywhere between 4 to 6 months to complete. When rigs are operating, then they are operating for 24 hours a day, 365 days a year for 3 years. Any equipment which is running continuously, even if you do maintenance in phases, whilst the rest of the rig is in operation, you will still not be able to achieve the criteria requirement, which is specified by the certifying body. It is more on account of safety and long-term protection of the equipment rather than anything else. It is like servicing your car. If you service it properly at the specified intervals, then it will work with you for a longer period of time.

Right. And last point, sir, since we are in the process of tendering, we have already submitted the tendering for Jindal Explorer. In terms of the refurbishment cost, can you outline how much we will be spending going ahead on the same?

We are not disclosing that. And it also depends on the tender criteria. Because for different oil wells, the locations are also different. And for those different locations, if new equipment is required, then it is the responsibility of the contractor to procure that equipment. Therefore, the cost of refurbishment, whilst we have a general idea, a specific number cannot be given right now. And further, we are also not disclosing the refurbishment cost that we are incurring.

Right, sir. And lastly, sir, this rig, Jindal Explorer is deployed in which water, I mean, which part of the geography in the country?

Bombay High. All five rigs are deployed in Bombay High.

And this is where the region they wanted to improve the output that is what you articulated earlier to the participant.

Yes, sir. And I will very strongly urge you, to refer -- Okay, sir.

I read and sir, there are other points which we can take offline. But my understanding was other than this, the entire ancillaries involved will all get a flip, not only the rig. The entire ecosystem will get the flip. That will include the pipe segment also, the other categories also. That understanding is also correct, sir?

That is correct, 100% correct. But when such a press release has been given, it will take some time for ground level capital expenditure to increase. But when that happens, 100% all oil and gas sector-related industries will benefit.

The next question comes from the line of Rahul Agarwal from Bandhan Mutual Fund.

Great set of numbers. I have a couple of questions. I'm not sure if this is covered. So broadly, when I'm looking at some of the contracts that are signed globally in the last maybe 6 months, I don't have a lot of data in the near term, but I see some contracts signed in September, December. They have been in the range of $180,000 kind of day rates. So is that something which the industry has moved now and that is the new normal compared to $120,000, $130,000 that it used to be? Like bore drilling, Valaris, they have signed some $180,000 contracts in Africa and all that?

The rig which they are using, their technical specifications have to be checked, Rahul, because if they are 350 feet jack-up rig, then that has to be checked. The second is that the cost of operations in international waters are different from the cost of operations that are in India. Thirdly, the benefit that we get with ONGC, which is not there with international contractors is the benefit of long-term contracts, which are firm in nature. So once the contract has been awarded and the performance bank guarantee has been submitted, the contract cannot be canceled. That benefit is there in India. So whether that benefit is also there in the contracts which are being received by these entities, is the third thing which has to be checked. Generally speaking, oil and gas market is in an up cycle. And we are quite bullish on this sector, which is why we have refurbished Jindal Supreme at a significant cost as well, even though it is a rig which was manufactured in 1975.

Got it. So yes, you're right. Globally, I think, Valaris and all signs only 40, 50 days contract. So that is correct. So the other thing is in India, how many rigs would be operational as of now?

More than 30 rigs, definitely more than 30 rigs. I was not able to take out the latest data. But if you have subscription to Petrodata, then that figure is very easily available.

And are you seeing any kind of movement on the supply side? Are you seeing some of these shipyards or others starting to make rigs or that something still not started?

It has not started yet. The economics don't make sense as of now, because if you're putting in $250 million to $300 million over a period of 3 years and day rates are at $100,000 per day, that is a theoretical figure, then the payback period calculation is more than 10 years. I think, it can go as high as 15 years if you consider interest at 7% to 8%. Therefore, people are still reluctant to build new rigs due to the long gestation period.

Got it. And are we getting opportunities to acquire rigs maybe at distressed valuations globally? Is that something we have found more opportunities or not found?

We are not getting opportunities to acquire rigs. When the market is in an up cycle, these opportunities dry up.

Okay. And last question from my side. Normally, how do you hedge? What is the hedging policy?

We have a natural hedge, because the rigs that we own, we don't have to pay any rentals. All the three rigs that are rented, the receivable in USD is much higher than the receivable -- than the payable in USD. Therefore, we have a natural hedge.

But your natural hedge is still what extent? Is it like 60%, 70% or it's as high as 90%?

100%. All these rigs, the three rented rigs, the rate that we pay is denominated in dollars.

Correct, but you make a margin. So that much you will be exposed to? Even in your own rigs, that is not something which you have a natural hedge, right? Rented, I understand, but your owned rigs will not have a natural hedge, right?

Okay. But the rate of inflation in India is generally higher than the rate of inflation in the U.S. So dollar will continually appreciate.

Yes, that's what. I understand, that upside we will get, I agree. So I'm just trying to understand what is -- how big can that upside be?

So for the payable, we have a natural hedge. And for the open receivable that we have, we -- sometimes we do have forward contract bookings. But generally, we keep them open. That is why we have a foreign exchange gain of around INR 9 crores in the December quarter. And if the dollar remains at the level where it is right now, we should see similar gains in March quarter, because the dollar -- half of the dollar appreciation happened in December and the rest of it happened in January.

Okay. Okay. And lastly, is there any other upstream service offering that you are thinking about apart from the rigs?

Not right now. It is only in the rig segment that we are working. And it has been a long journey to ensure that all rigs are operational, because in the past 7, 8 years, there was always a time when one rig was either under refurbishment. By the time it came out of refurbishment, the next rig went into refurbishment. So we've never achieved a timing where all rigs were operational so that the entire impact of 100% operations can be reflected in financials. That will happen for the first time in March 2025 quarter. First time after a very long duration, maybe 7, 8, 9 years.

The next question comes from the line of Siddhartha Mathew, an investor.

Congratulations to the management team. I just wanted to get a sense of what are some of the risks that we see in this business overall other than, I mean, sustained oil prices, ONGC potentially canceling or renegotiating contracts? What are some of the other risks that we can think about?

The only risk in this industry is securing a contract from ONGC. There is no other risk which cannot be addressed apart from the ability to secure a contract from ONGC. Everything else can be addressed only once we get a contract from our customer. Once the contract is received, then it's a firm contract. It is not renegotiated. It is not canceled.

The next question comes from the line of Abhi, an investor.

I think, my question was touched upon just a couple of -- someone just prior to this. But I want to just touch based on that. I think, you guys are in contracting of rigs business. But looking at the oil exploration prospects in future and also looking at the recent, this ONGC press release on 9th January, isn't it worthwhile to build that competency of technical exploration services or the technical service provider, what ONGC is looking at international players? Are we not in a position to kind of start looking at building that competency in-house so that, that would be a good combination along with rig rentals? Does that make sense?

I can understand what you're saying, but that is more of an advisory role, which is not where we are positioned. We are in the business of operating rigs with ONGC and getting paid for it. And we have been doing that for the past 35 years. In addition to operating jack-up rigs, offshore jack-up rigs with ONGC, we also have directional drilling and mud logging services, which are small divisions and give good margin, but it is not possible to scale those businesses up. That is the entire universe of services that we offer. And I don't think we want to diversify into other businesses, because in our current business, we are making 30%, 35% EBITDA margins, which will only improve going forward if we are able to consolidate rigs into Jindal Drilling, one of the rigs which we want to purchase, we hope to conclude the transaction within March 2025. And that will also shoot up our margins. Therefore, on a consolidated basis, we think that our market leadership position is justified and that is where we want to capitalize on. We don't want to diversify into sectors which we do not fully understand. Rather, we want to grow in sectors where we are market leaders, thereby playing to our strength.

Agreed. I think, the point is -- so let me put it this way, right? I think, you also just mentioned early in the call that, the entry barrier to this industry is pretty high CapEx and adding rigs, new rigs also is like dependent on high CapEx as well, right? So looking at 3 to 5 years down the line from a growth perspective, I think, there would be kind of a linearity in terms of the amount of -- number of rigs that you would deploy and the kind of revenue growth that you would get, right? And that's where I think, the value-added services not only provides edge in terms of getting to know the requirements of ONGC, but also adds more non-linearity to the revenue growth is kind of a thought process. But I understand that's where I would leave it.

In this quarter, let us conclude the Jindal Pioneer transaction, which I have been promising shareholders for more than a year now. And I really hope that, that transaction goes through. Once that happens, then we can do a reassessment. But for now, all our energies are focused in ensuring that the Jindal Pioneer transaction is concluded. We appreciate your feedback, sir, but please bear with us for one more quarter.

The next question comes from the line of Manikanth, an individual investor.

Sir, just now you have touching up on that point, right? So what is the main reason that's stopping or holding back the acquisition of Jindal Pioneer, because it's been a year? So is there any real problem that we are facing or what's stopping that?

There is no problem as such. It is only the gamut of regulations that we have to navigate. When we obtain shareholder approval in March of 2024, we wanted to conclude the transaction quickly. Now in order to conclude the transaction quickly, due to the difference in the execution of the transaction and the physical delivery of the rig into India, due to that time gap being longer than is permitted by existing regulations, we have to obtain approval. So we applied for approval in April 2024, and we kept following up for the approval. Unfortunately, that approval is still pending. However, since almost a year has elapsed. Now we don't require the approval, the application for approval has become infructuous. That is our reading of the matter. We are taking an opinion on it. And once we get a clear opinion, then we'll have to approach the customer with whom the rig is deployed and take his consent to go ahead with the transaction. That is the entire story behind this. When rigs are given on rent to a third party, then the third party has to approve the change of ownership of the rig.

Okay. Got it. I hope that will commence in this quarter. And second one, sir, regarding Jindal Explorer, we have hardly, if I'm not wrong, 4 months of time. And you said that you have already quoted for the next order. So can we expect that to complete in this 4 months? Or do you see a CIA sleeping time for Jindal Explorer for some time?

We will get to know whether we've got the contract or not before conclusion of the contract. And even if we don't get the contract, then we'll be able to participate in the next contract, because once the contract ends, even if it ends in May, then we have a 6-month gap in which we are -- we have to refurbish the rig. Therefore, the new contract is still some way off. There is no risk right now.

And sir, my final question is, you said like you have a net cash -- good net cash now. So are you looking at acquiring other rented rigs as well, like you are planning for...

The reason why we are conserving the cash is, because we have to pay for Jindal Pioneer. If that transaction goes through, then we'll have to make payments.

Sir, how much of the cash will go for Pioneer? I think you said $75 million.

$75 million is the purchase price.

The next question comes from the line of Dikshant from DB Wealth.

Congratulations on such great results and congratulations on the up cycle as well. Sir, the whole idea of asking the question is, where are we in the cycle right now at the larger stage? Are we starting the up cycle? Or are we already well through in the cycle right now?

The up cycle in the oil and gas industry started after the Russia-Ukraine war, in February 2022.

So since you are a pioneer in this particular industry for so many years, I would want to understand that where is your sense of this cycle? Do you think it's going to be a 5- to 7-year cycle, because such cycles tend to be longer than shorter. What is your outlook on this, sir?

It will be a longer cycle, especially because of the political change that has taken place in the U.S. with the new government wanting to improve drilling operations. We believe the cycle will be longer than before.

Okay. So do you think it's going to be like a decade-old cycle or it's going to be like of 5 years from now cycle?

If I would have been able to predict that with accuracy, I would just go ahead and start trading in oil futures rather than work in Jindal Drilling.

No, sir, I completely understand. I completely understand. Sir, the second question is on the line of -- see, right now, we are in a good stage cash-wise also, our particular operations are also at running at maximum efficiency, as you just pointed out. Do you think that we have now made after the Ukraine war, the oil is at a particular bottom also, hopefully? Do you think now we are at a point where we can look to be aggressive on another expansion front? Or what is your guess on this? Are we looking to improve our operations, do some sort of CapEx? Or are we looking to improve our efficiency right now?

The only CapEx which we are doing is acquisition of Jindal Pioneer, which is expected in this quarter. That is the only acquisition on the cards right now. Once that transaction is done, we'll do a reassessment.

Okay. Got it. Sir, one more question on the cycle part. I understand, it's difficult to predict any cycle, but do you think that like we are at the peak of the cycle right now?

No, because crude is not at an all-time high for an extended period.

The next question comes from the line of Saket Kapoor from Kapoor & Company.

Sir, as you mentioned that $75 million is what is envisaged for the acquisition of Jindal Pioneer, so that is the enterprise value, the total cash outgo we are going ahead or the enterprise value, including the debt, which it may carry?

There is no debt. There is no debt on the rig.

So that is the enterprise value we are paying. And sir, this asset has been deployed in the Mexican water. So we will be aim to deploy it in the same vicinity? Or what would be the thought process going ahead with respect to its deployment?

We want to bring the rig into India. That is why we want to buy the rig. Rig rates in India are good and the asset remains within our control. So unless we get a really good rate like $180,000 as one of the earlier participant was mentioning, unless that happens, we will deploy the rig in India.

And lastly, sir, what is the year of manufacturing for this asset?

Jindal Pioneer, March 2015.

As there are no further questions, I now hand the conference over to the management for his closing comments.

Thank you, shareholders, for participating in the earnings call. We try to provide necessary inputs on the performance of the company and explain whatever is required so that your understanding is improved further. In case there are any further questions, please feel free to reach out. We are committed to enhancing value for all stakeholders and improve profitability of the company. We are working on that, and we also take into account the inputs that we received from our shareholders. Thank you to Mr. Varatharajan from Antique Stockbroking for organizing this call, and I look forward to interacting with you in future.

Thank you. On behalf of Antique Stockbroking Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.