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December 11, 2001

Hindustan Oil Exploration

HOEC is an oil exploration, development and production company with expertise in prospecting and extracting oil and gas from allotted fields. Its major shareholders include Unocal of US (26%), HDFC (10.7%), ILFS (4.29%) and Jehan Energy of UK (8.5%).

Oil exploration and production is a risky business as majority of costs are incurred before any revenue accrues and in most cases, costs have to be written off if no oil/gas is found. The risk is reduced by having a wide portfolio and increasing technical capabilities. HOEC has over the years developed a wider portfolio and technological skills thus increasing the success ratio to 1:4-5 as against a world average of 1:10.

The company suffered in FY98 and FY99 as its exploration work in Cambay was unsuccessful and it had to write off its expenditure, thus incurring losses. With production work starting in PY3 oil field, performance has improved and HOEC declared a maiden dividend in FY2001. For the latest quarter ended 30 Sep, PAT grew by 71%, though primarily driven by reduction in tax liability. Going forward, performance will improve in remainder of the year as oil production in PY3 is expected to increase, though declining oil prices could pose a dampener.

The biggest kicker is likely to come from PY1 gas filed which HOEC is proposing to develop along with Tata Petrodyne and ONGC. The gas will be supplied to a power plant in Tamil Nadu. The only stumbling block is the signing of purchase agreement which is getting delayed. Once signed, the revenue and profit potential is high. Revenues can be as much as Rs 2.5 bn per annum and HOEC’s share at 30% will be around Rs 800 mn p.a. Operating margins are high at 80-90%. The developmental expenditure will be to the tune of US$80 mn to be shared by all partners. Development work is expected to start in early next year and production can start by end 2003. HOEC also proposes to start Phase II of the project concurrently which would involve additional expenditure. However, overall profitability is likely to be high.

The stock price at Rs 20.1 discounts annualized EPS for FY2002 by 10x. The company is cash rich with Rs 338 mn in financial investments, Rs 350 mn in deposit accounts, and Rs 420 mn in Corporate Deposits as on 31 March 2001 and debt of only Rs 6.5mn. This works out to Rs 19 per share in cash and investments. The cash position could only have improved after that. Thus, the stock is trading at near cash valuations, with improving prospects and a potential money spinner, in PY1.

5Paisa Team

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