No upside potential seen in HOEC

Current M-Cap At 22.6x Estimated Profits Is Higher V/s Larger Cos Like ONGC, Oil India

HINDUSTAN Oil Exploration (HOEC), which was trading around Rs 100 in mid-July 2009, has more than tripled in the last three months to near Rs 350. The trigger was the commencement of natural gas production from its PY-1 field in Cauvery basin, which was achieved just ahead of Diwali. PY-1 field was awarded under pre-NELP round for which the production sharing contract was signed in 1995.
This is a major development for the company, which had posted a net profit of Rs 53.6 crore on net sales of 85.2 crore for FY09. The company holds working interest in nine E&P blocks in India, which includes 100% ownership of the PY-1 field.
The other major producing field PY-3, where the company holds non-operating 21% stake, continues to remain under shutdown since July 2009 following a technical problem. Three other blocks in Gujarat, where HOEC holds stake, are producing tiny quantities of hydrocarbons and the fourth one got a DGH approval for development plan. The company has also made a natural gas discovery in Assam, which is being apprised. Recently the company also obtained exploration licenses for its two blocks in Rajasthan that it won in the seventh round of NELP.
As at March 31, 2009, the internal estimates of the Management of proven and probable reserves on working interest basis for the Company is 53.4 million barrel of oil equivalent, which is less than 2% of ONGC proven reserves.
Last year Italy’s Eni Group took over HOEC’s parent company Burren Energy and following a mandatory open offer, now holds over 47% in the company. The change in ownership not only benefited HOEC in terms of technical leadership, but also by way of a $125 million loan on attractive terms from Eni.
At its plateau production level of 50 million standard cubic feet per day (mscfd) the PY-1 field is capable of generating around Rs 300 – 350 crore in revenues annually for next six years.
Assuming the net profit margin at 50%, the company is likely to earn annual profit of around Rs 200 crore. HOEC’s current market capitalisation is 22.6 times this estimated profits, which is higher compared to its larger peers ONGC and Oil India and thus looks fully priced leaving little upside potential for new investors.