Hindustan Oil Exploration Company Limited (500186) Earnings Call Transcript

Good morning, everyone, and a warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations for HOEC Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the second quarter and half year -- first half year ended financial year 2021. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's 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 with 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. Now I would like to introduce you to the management participating with us in today's 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, and good morning, everyone, and a very warm welcome to our call on quarterly results Q2 FY '21. Hope all of you continue to remain safe. I have with me our CFO and Whole Time Director, Mr. Jeevanandam; and Valorem Advisors, our Investor Relations advisers. I hope you all have received our updated earnings presentation. We've also uploaded that on our website for your reference. In the midst of uncertain times caused by the global pandemic, the oil industry, in particular, is fraught with extreme challenges of supply glut and demand slump. Though the oil prices are stabilizing in the range of $40 to $45 per barrel, there is now increasing uncertainty in light of the second wave of pandemic in Europe. In India, while the fear over COVID seems to be receding, the threat remains high with different levels of risks at different parts of India, posing challenges in executing projects. Our management's philosophy has always been to focus on the things that we can control, which, in the context of our business, are 2: volumes and costs. Following strict protocols, we have kept our production operation continuing safely with lean teams at all our operating sites. We continue to accord first priority to safety of our personnel and the facility. In Dirok, we have stepped up to the rising demand for natural gas in the region and have produced at an average of close to 40 million standard cubic feet per day in Q2 FY '21. This is the highest ever average production achieved in Dirok. This was achieved using the existing infrastructure of 4-inch [indiscernible] pipeline in addition to the 12-inch pipeline, and no additional investments were made for increasing the capacity. Dirok field has consistently set new standards in terms of project planning, execution, safety and now it has in terms of production as well. It was a matter of great satisfaction to all of us in team HOEC that the public hearing for Phase 2 of the Dirok project was conducted successfully last month at Tinsukia in Assam. Phase 2 of Dirok development envisages drilling of 3 additional wells and increasing production to 55 million standard cubic feet per day. This successful public hearing was conducted in the challenging backdrop of Oil India's Baghjan blowout and genuine concerns regarding the hazards of oil and gas operations in the minds of the local community. This is a testament to the goodwill HOEC has generated in the minds of local community, the safety record being maintained and the impactful CSR projects executed in the vicinity of our Hollong Modular Gas Processing Plant. The continuing demand for additional gas to be produced in the region by the consumers gives us further confidence in the long-term performance of this asset. On the policies front, though no announcement has been made on gas pricing, government has recently come up with guidelines for e-bidding of natural gas produced in the country to standardize the price discovery process across regions. This is encouraging for Dirok, whereas part of Phase II development, Dirok JV is laying a 35-kilometer pipeline to reach Duliajan gas market hub. Once Dirok JV has the infrastructure to supply gas directly to end consumers, a standardized e-bidding mechanism and price discovery process will help Dirok gas receive market-linked pricing. We expect major consumers to participate in this bidding, including Oil India, who is our sole customer currently. In PY-1 offshore theme, prolonged customer shutdown and inconsistent offtake have adversely impacted the performance of our wells. This situation continues with declined production from wells. To improve production, rig-based well intervention in the form of workover of existing wells and drilling of new wells will be required. Geological studies are ongoing to plan the next drilling campaign in this unique fractured basement reservoir. Application for environmental clearance has been filed, and it is under process. Plan is to commence drilling in PY-1 after first oil from B-80. On a related matter, I'm pleased to share that the PSC for PY-1 block was granted extension to continue operations till January 4, 2021, while the addendum to the PSC for 10-year extension is being processed for execution by the government. This was achieved by both government and HOEC, agreeing to refer the outstanding matter of the method for calculation of royalty whether on a well head value or on realized sales price to the Dispute Resolution Committee. To update you on the arbitration award matter of PY-3 block, company's appeal has been taken on record in the appropriate court in Malaysia. In the high court of Gujarat, company's application for vacating the ex parte interim order was heard and the interim order was vacated consequent to the withdrawal of petition by Hardy. Hardy then filed a new petition for enforcement of foreign award. After hearing both the sides, the matter is adjourned till January 22, 2021. Coming to B-80, our asset of focus for this year, we are well positioned to execute the final leg of the project during the current West Coast weather window that continues till end April, early May. As you're all aware, our second well had to be drilled during the lockdown. This global pandemic has adversely impacted the lead time for several critical equipment and materials required to complete the project. We had to embark on a global search to source items from inventory. We have now sourced all of them from different parts of the world, two of the most critical items being the flexible pipeline required to export both oil and gas and the single-point mooring system, called SPM, to moor the floating storage and offloading vessels. We are preparing now to mobilize a MOPU from Lamprell shipyard in Sharjah to site starting early December 2020. Contract for flexible pipeline is awarded and is to be mobilized from U.S.A. The umbilicals are ready to be transported from Brazil. The single point mooring system is sourced from Batam and discussions are on to finalize the installation contract with those who are mobilizing the marine spread for ONGC project in Western offshore. For the evacuation of FSO, [indiscernible] is purchased by our group company Hindage Oilfield Services and is getting ready for dry-docking at Sri Lanka. For gas export through ONGC pipeline, execution of engineering works is being firmed up in consultation with ONGC for execution. To sum up, we are gearing up to mobilize all the project materials from December 2020 to January 2021 and commence the offshore installation work in February. We estimate the period of installation to be 45 to 60 days, depending on the prevailing weather conditions. We expect to complete the installation work by end March and mid-May -- between end March and mid-April 2021. As soon as the export facilities are installed and commissioned, we will be ready to deliver first oil. Therefore, despite the challenges, we have so far managed to maintain the project on track. We stand committed to make our best endeavor to produce first oil by April 2021. On the gas marketing, we will follow the e-bidding procedures to be published by the government, and similar method will be followed to determine fair market price for crude oil. Both oil and gas produced from B-80 enjoys free marketing rights within India. Our full focus is on bringing B-80 to production and to start realizing the revenues from this field. Until then we would defer any other significant capital outlay in view of the current business environment caused by the pandemic. I now invite Jeeva to take you through the financials.

Thanks, Elango. We report that the company made a revenue of INR 33 crores in the current quarter against INR 27 crores in the previous quarter. In the corresponding quarter in the previous year, however, it was INR 62 crores in the stand-alone accounts. In the consol accounts, it is INR 36 crores against INR 29 crores in the previous quarter. This increase in revenue is mainly due to better offtake from Dirok. This quarter, profit on stand-alone is INR 10 crores against INR 13 crores in the previous quarter. And the consol accounts, the profit after tax for this quarter is INR 12 crores against the INR 12 crores in the previous quarter. There is not much variation. Total expenses on stand-alone account is INR 23 crores, comparing INR 14 crores in the previous quarter. Statutory levies include an additional payment of royalty of INR 3 crores paid under protest for PY-1. Other costs were akin to the increase in production, such as depreciation, depletion, and the notional exchange loss of about INR 2 crores. Out of that, increase of INR 9 crore, INR 3 crores to INR 3.5 crores, INR 4 crores related to the noncash items. For this quarter, the total expenses, including depreciation and depletion on the consol account is INR 24 crores comparing INR 18 crores in the previous quarter. Operating cash flow stand-alone for this quarter includes -- is INR 29 crore, comparing INR 19 crores in the previous quarter. In the consol results, the operating cash flow stands at INR 28 crores, comparing INR 19 crores in the previous quarter. The company's stand-alone cash and cash equivalent is about INR 85 crores as on September 30, and the cash and cash equivalent of consol is INR 110 crores. In case of B-80 development, mobile offshore processing unit is ready to move from yard at Dubai, and FSO is to be dry docked while the single point mooring is procured and installed before the end of the financial year. These facilities are resourced through our own subsidiaries with borrowed capital of about INR 85 crores, out of which INR 43 crores are yet to be drawn to meet the cost towards the SPM and installation. These assets suggest MOPU and FSO are movable assets, which will add substantial value to the service business of the subsidiaries during the captive use in B-80 Field. Our current liability in stand-alone account is INR 87 crores as on September 30; and our current assets, excluding subsidiary loan and inventory, is about INR 154 crore. In consol, current liability of INR 152 crores and the current assets, excluding inventory, are INR 192 crores. This means that we are not [ constrained ] for meeting our obligations. We are confident that we'll meet our obligations and would monetize the B-80 investment in the ensuing financial years. All our subsidiaries will be on the revenue mode from the next financial year. With this, we will embark on an unhindered overall growth of E&P assets of HOEC as well as the oilfield services of our subsidiaries. Thank you.

Thank you. Anuj, we can open the forum for questions now.

Okay. Operator, please go ahead.

[Operator Instructions] The first question is from the line of Chintan Sheth from Sameeksha Capital.

Congrats for the good recovery for Dirok. Sir, one point I wanted to check on Dirok is that because of the Oil India field fire incident, the incremental volumes might be coming from that demand or there is actual underlying demand has grown in the region?

Chintan, it is both. We see a trend where the underlying demand also seems to be growing. Of course, on an interrupted basis, the Baghjan incident also ensured that Oil India was not able to make its full commitment. So it was drying. So ultimately, we supply only to Oil India. Oil India in turn caters to the local demand, but we also see the trend in increase in the underlying demand.

Okay. And secondly, on the PY-1, you hinted to us that post B-80, we will take up the project for the additional well drilling and all. But the extension, how confident you are that 10-year extension we will be securing? And what are the hurdles right now with the government on the royalty and additional revenue sharing issue, which you have talked about?

Yes. Chintan, we have received the letter of extension for the next 10 years with the condition that the outstanding issue, which was to do with how to calculate the royalty on gas, whether on a well head basis [indiscernible] based on statutory notification or on the basis of the realized sales gas price. Now this issue was one of the conditions put by the government. Therefore, we engaged with the government and reached a consensus with the government to refer this matter -- because the matter is based on statutory notification, to refer the matter to the Dispute Resolution Committee and proceed with the execution. So this has been agreed by the government and the matter has been referred to dispute resolution. So there is no other hurdle. It is simply the process of getting the amendment signed within the internal process of the government. That is ongoing. Therefore, the government parallelly came, which gave us the written authorization to continue operations as they process the case for the formal amendment execution of the PSC for the next 10 years. And this is a practice government has followed in all other blocks as well. So we are absolutely confident there is no risk of -- no risk to the extension of the PSC, et cetera.

Any committed CapEx we have to incur on that to get the extension? Or this is the only issue which is being reviewed currently?

No, the -- this is the only issue which was there, and this now having been referred to the Dispute Resolution Committee is a matter of process for signing the amendment.

Right. And lastly on the Kharsang, sir, we booked some additional royalty there, I think. So -- and if I check the overall volumes also, I see some softness in the Kharsang volume as well. If you can update on that part as well and the extension there.

Yes. The Kharsang also is undergoing -- the government overall, if you look at the -- this is a matter public record. Government in its extension policy had put one of the conditions. Whatever be the outstanding revenues or demands of the government from the contractors will have to be settled before the extensions are granted. So several legacy issues come up before the extension. And in respect of Kharsang, there was an issue related to the -- how to treat the delay in obtaining ForEx clearance in the past in terms of the cost recovery limits. Now that is debated in the management committee. But meanwhile, government gave authorization to the contractor to continue the production operation. And in fact, the mining lease for Kharsang also has been issued for the next 10 years. So the formal amendment will be done after the issues related to the cost recovery is resolved. That is ongoing at the management committee. That is handled by the operator of the field as such. So we don't see any risk to the extension there. Any investment, as you are alluding, by any contractor will be made only after the formal amendment is executed between the parties. That is, I think, understood by both the government and the contractor. On a day-to-day operation basis, in Kharsang is slightly different environment compared to Assam, where the land value situation and the pandemic situation is slightly different. So right now, the field is operating, producing an average of around 600 barrels per day. And further investment in the field will be made only after these issues have been resolved and the amendment is executed.

Okay. And lastly, sir, on the liability front, we saw a sharp drop from March to now. I believe some part of that is related to the payments made to the vendors for the B-80. Can you highlight and clarify any specific -- other than that any specific reduction in labilities?

We have settled with most of the contractors, and only one contractor has come to arbitration, which we will also settle by the year-end. We have got adequate cash at the moment in the bank to settle all our liabilities. And we have no issue thereon.

So any payment we made to Hardy on this front?

Hardy, we have not made any payment. We have not referred to make any payment at the moment because this case has been deferred up to 21st of January next year. And it is depending on the outcome of the Malaysian court and then against about the Indian court. Our contention is this award is partial. So it will take its own course of time. When the court asks us to deposit, we are careful of depositing the money immediately.

Okay. So it's purely related to the B-80 vendors mostly?

That's it.

The next question is from the line of [ Tejas Shah ] from [ Unique Stockbroking ].

The oil -- B-80 oil that you are saying will start only around April 18...

Sorry to interrupt, Mr. Shah. Sir, we are not able to hear you clearly.

The oil production of B-80, that will only happen around April 2021. So what is the revenue you are looking at from that? And currently, the gas prices have gone down, and only production is, I think, Dirok. So this is what the same run rate we will see for -- up to March '21?

Yes. As Elango has told, next year only we will be having production -- next financial year only the B-80 production will start. Till the time, we will be having the current level of production. And the current level of revenue will be lesser than the current level of revenue because the gas price has been reduced. And unless there...

Sorry, what is the hit that we are looking at this quarter?

The current price is about $1.9 per MMBTU. And that we are looking at as if there should be some revision or something will happen, then there will be an improved result in the last quarter of this financial year. And we expect the third quarter to be at a little lesser than the current quarter.

The next question is from the line of [ Rohit Koti ] from Marshmallow Capital.

Thank you for the detailed remarks in the beginning. Sir, my first question is on Dirok Phase 2. When is it expected to be commissioned? I think I missed that.

Yes. Rohit, what we are doing currently is to get all the regulatory clearances that is required for the project, and there's been delays because of the pandemic situation. The most important one was the public hearing. So that was something initially planned to be held sometime in March 2020, that got postponed. And finally, it held -- got held on October 23. Then the process of environmental clearance will go through. And second is the forest clearance for the 35-kilometer pipeline. There also, the application is under process. There has been some delays due to the current situation. And second thing, we also felt, given the current overall pandemic situation, doing onshore projects, which is outside the confines of our operating plan, is -- exposes us -- the company to risk unmitigable as such. So what we thought was to really focus on the offshore project in B-80, complete that and, in the meantime, get all the required statuary clearances and then execute the project. Project per se, as you've seen from this quarter, we already have facilities to deliver about 40 million cubic feet consistently against the planned capacity of 35 million cubic feet. To increase the production primarily requires drilling of the well, which will be undertaken only when the pandemic situation improves. So we are not really expecting the additional production through additional drilling to come in the next financial year. It will be after that only. So we will give you a clearer indication of time line for Dirok 2 after the -- once we obtain the regulatory clearances as well as the pandemic situation improves.

Okay. Understood. That was helpful. And sir, the next question is on PY-1. So while we saw a ramp-up after you and Jeeva sir took over, it has been quite erratic in comparison to your other field. So why the focus -- I mean -- and we have done a workover and increased production and then again, because of weak offtake, the production has fallen off again. So if you could expand a little more on why we are focusing on this asset next after B-80. And if the offtake is so erratic, is it related to the pipeline issue, is it related to the customer issue? And how do you expect this to be resolved given that we're going to focus on this next?

Rohit, the first thing to remember is PY-1 is 100% owned by HOEC, and we already have all the development infrastructure, which can -- which has the capacity to handle much higher volume in terms of the processing capacity and pipeline capacity. What is really required is to drill the well. Obviously, being an offshore well and this being a very unique fractured reservoir, which is unique of its kind in India, it has got its own technical challenges. But what we thought was the issue related to marketing is really, once you reach a higher threshold, for example, this plant is located next to the PPN power project, which initially the PY-1 gas was going 100% to that plant. But that plant requires a minimum of 17 million standard cubic feet per day. If the volume is below that, they cannot operate the plant. Therefore, when our volume reduced to below 10 level, then GAIL diverted into smaller consumers in the region, including some power projects as such. So what we believe is if we could drill the additional wells and increase the volume, we can then look at a different marketing strategy if required with some additional investment to take the gas to the market. And we are also seeing in the context of the Ennore LNG plant, which is set up in Chennai. IOC is also increasing the pipeline capacity, grid network in and around that region. So you're right, we would take the investment finally based on both the technical risk as well as the marketing part, both of which we believe has got a potential, particularly in the context of growing city gas distribution in the region, where several new licenses are being awarded by the government. So we see the scope for -- in the area of city gas distribution. And therefore, when the volume is revised, marketing is not going to be a real challenge. That's what we believe.

Okay. Understood. That was helpful. So as of now is there any constraint on the pipeline side, capacity of pipeline in that area?

No. As of now the, really, constraint is twofold. One is the power plant. As you know, in Tamil Nadu goes the merit order. Our gas price is $3.65 per MMBTU. This is a contractually committed gas price. Therefore, in the merit order, when the rest of the country, the APM or the domestic gas price, the guidelines, is about $1.9, this is at $3.65. Therefore, the -- in the merit order, this gas-based power plant come lower. So we need to look at segments, which is outside the power sector, particularly city gas distribution, to market the gas, which can absorb a better price.

Understood. That was helpful. Sir, my last question, the start of the Indian gas exchange that happened a couple of months back, how do you see the impact on it -- of it on producers like us?

It's a very positive development, particularly for our field in B-80. So Hazira has been declared as one of the delivery points under that exchange, which means anyone in Gujarat, who is ready to take delivery of gas at Hazira, can bid for it and take at a premium price. Certain volumes can be sold with the delivery being happening in Hazira because our gas will -- through ONGC system will go to Hazira. So we see it as a positive development. In fact, we are actively following that. We made some suggestions for having a similar hub bin in Duliajan. So it's a very positive development. And I see the way the power segment got transformed with the exchanges, this sets a -- there's a good long-term future for this.

So does this reduce your marketing effort, which you initially were planning once B-80 came on stream and there is no issue as of now with -- I mean because GAIL pipeline, I'm guessing, would be used for transportation of gases. And there is no issue -- or procedural or any other issue on that front. Is it -- am I right in thinking this?

Yes, Rohit. This really clarifies -- particularly in the back of the recent government guidelines on e-bidding, it makes it very, very transparent, effortless and quite competitive.

The next question is from the line of Kishan Mundhra from Systematix Group.

Two questions from my end. Firstly, the employee benefit expenses, the total quantum looks a little low compared to the size of your company and compared to the amount that you spent last year. So if you could throw some light. I mean is it the case that some of the payment that you're making is classified as consultants payment and hence getting included in other expenses? Or is it actually so low?

The employee expenses last time was the onetime bonus given to the executives, that is, about INR 3 crores. But for that, whatever the total employees are working on the projects, which is within the group as such, where we are the operator. So we are able to charge it to most of our expenses to the respective joint venture partners as we are working on their behalf, they being the nonoperators. So that is why our [ cost for the ] company per se has come out much lesser. So this would be the trend in the future as we are embarking on many of the projects on the online now.

Okay. And the -- our share of the employee expense, do we have to charge it to profit and loss? Or do we capitalize it as well?

Depends on the project. If it is a project where the production started, we will be charging it to P&L. If it is on a construction project, like B-80 or the new development in Assam or PY-1 development, where the people associated with the development will be capitalized.

Okay. Understood. And second question, sir, you made a payment of INR 3 crores for the dispute resolution. So where have you classified that, sir, in profit and loss account?

That has been charged to P&L account, this being a royalty payment. Normally, it is under protest. We can take it as a receivable because still the dispute is to be resolved, assuming that would be in our favor. For conservative and on a prudent basis, we have charged it to the P&L account at the moment. That's why the current year profit is reduced by INR 3 crores.

The next question is from the line of Chintan Sheth from Sameeksha Capital.

One question on the e-bidding...

Sorry to interrupt, Mr. Sheth. Sir, your voice is sounding muffled. Can you...

Is it better now?

No, sir, it's still the same.

Wait a minute. Yes, is it better now?

Much better, sir. Thank you.

Yes. Sir, on the e-bidding side, if you can elaborate how the earlier contracts would be impacted because of that. Because earlier, the gas marketing freedom was not there in a few of the PSCs, but e-bidding will allow marketing freedom. How does this work in the new region?

Chintan, e-bidding, basically, wherever the marketing freedom has been allowed, which now for any field development plan that is approved after April 1, 2019, anywhere in India, enjoys a marketing freedom. The pricing -- discovery of pricing, this government wanted to come up with a clear guideline so that the discovery process is transparent and efficient. So the guidelines basically would specify -- they will notify the detailed procedures on which are the exchanges and how will you determine the -- discover the gas price by allowing market participation. So -- but wherever the marketing freedom is not provided, there the existing contractual arrangement will continue. For example, in PY-1, we have executed contract for the initial development with GAIL that will continue. For B-80, we enjoy full marketing freedom. So we will have to use the exchange to discover the price.

Right. So the PY Phase 2 PSC and Kharsang extension because it is happening after the April 19 date, that will enjoy marketing freedom?

That's correct.

And PY -- Dirok Phase I, that is, existing one, continue with the old regime?

Correct. Correct.

The next question is from the line of [ Hitesh Doshi ] from [ Mirjar Securities ].

Sir, all the 2 wells of Phase 1 will start production in April as per our current schedule or only one well will start in April?

No, no, both the wells will be -- commence production simultaneously as per the current schedule.

Okay. And sir, what can be the potential of Phase II? And I mean very macro and when can we start working on Phase II and what time line it will require to ramp up the production there? It's just very, I mean, quite early stage question, but yes, if you can guide us.

Hiteshji, as you said, this is a very early -- too early question because we really want to focus on executing the project. The only thing I would say is in terms of the facilities, we are creating -- the process facility is capable of handling 10,000 barrels of oil per day. The storage capacity we have in the vessel is about 900,000 barrels capacity. So we will not be required to put new process facilities. Depending on the performance of the wells during the first 6 months or 1 year, we'll come up with a plan to drill more wells in the future to keep the production extended for a long...

That can be at least 1.5 year away on production side, Phase 2, at least 1.5?

Yes. Yes.

The next question is from the line of Sreemant Dudhoria from Unifi Capital.

Firstly, on Dirok production in this quarter, which was higher than the earlier production capacity there, I missed, how did we do that? And what is the scope further there?

Yes. Sreemant, if you recall, when we began -- the Dirok has got 6 wells. 3 wells were drilled earlier and the 3 wells were drilled by us in the last campaign. So when we wanted to bring the field quickly on production, for the earlier drilled 3 wells, we laid a 4-inch pipeline and -- to a place called Kusijan, where Oil India has got some spare processing capacity. We used that to supply the gas. So that's how we commenced early production in Dirok, initially. Then we laid a 12-inch pipeline with this plant at Hollong plant operated on our behalf by Expro, that plant has got a capacity to process about 35 million cubic feet per day. So demand was more. We activated the Phase 1 -- the initial -- early production system also into operation. So simultaneously, we were transporting gas from both through 12-inch line as well as through 4-inch line. And 35 million cubic feet of gas was being processed at the Hollong plant, and about balance 5 million cubic feet was being processed at the Kusijan plant of Oil India, for which we pay some transportation tariff to them. So we were able to meet the full demand of 40 million cubic feet. So this model we have tested now we can operate on a long-term basis also. So it kind of gives us confidence that we can continue to meet the demand as the demand comes up.