Hindustan Oil Exploration Company Limited (500186) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Hindustan Oil Exploration Company Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Saloni Soni from EY. Thank you, and over to you, ma'am.

Good day, everyone, and welcome to the Q1 FY '27 Earnings Conference Call of Hindustan Oil Exploration Company Limited. The company published its results yesterday and have uploaded the investor presentation on the exchanges earlier today. I trust all of you would have had the opportunity to review them. Before we start, a disclaimer. Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause the actual results to differ from those anticipated. These statements are based on management's beliefs and assumptions on information currently available to the management. Audiences are cautioned not to place undue reliance on these forward-looking statements while making their investment decisions. On that note, let me introduce you to the management in today's conference call. We have with us Mr. Baroruchi Mishra, Managing Director and CEO; and Mr. Alan Josephandrade, CFO. Without further ado, I'd like to hand over the call to Mr. Mishra. Thank you, and over to you, sir.

Thank you, Saloni. Good afternoon to all of you who are on the call. Before we start, may I request you to spend 20 seconds looking around for your escape and evacuation routes just in case of an emergency, familiarize yourselves because that's a good thing to do when you start any conference calls or anything. So this is a standard thing that we should all be doing. So with that, let me start with a brief on how the quarter has been, what have we been doing and what is the look ahead for us. The quarter unfolded against a backdrop of continued focus on energy security, as you know, domestic hydrocarbon production and infrastructure development across the entire oil and gas sector has been a heavy lift for the country. While the broader industry continues to navigate operational and market challenges, the long-term fundamentals remain very encouraging for us, supported by the huge demand that the country continues to see now and in the -- in all times to come to be able to propel our growth by 7%, 8%, Energy becomes the bedrock of this growth for the country. Against this backdrop, our focus for this quarter remained absolutely clear. We continue to prioritize operational execution, production optimization and continue to work on our development projects while all the time trying to have a strict discipline in our capital allocation. While certain assets faced short-term operational challenges, we've made meaningful progress across the portfolio in positioning our key projects for future growth. So one by one, I'll take you through the progress across our portfolio, beginning with our offshore assets. So at BAT, our flagship offshore asset, production during the quarter was impacted by higher water cuts from one of the producing wells, resulting in lower output. Now if you remember, we had said last time that we have to do workover on these wells to shut off the water zone, et cetera. Incidentally, the water cut continued to increase and that has impacted production, but we continue to produce from these wells. In order to sustain production at near similar or slightly higher rates, we have changed the configuration of the compressor trains on the platform on the MOPU so that the compressors are now able to operate with a lower suction pressure. What that does is that allows the well to flow more even when the flowing wells -- flowing pressures of the well decreases. So that configuration change has been done, and we are in a test mode now. The workover of 2 existing wells, which is D1 and D2, we continue to stay on track. We are in discussion with the rig for the final award this month, and then they would be mobilized by October, at which time we will work over on the 2 wells, which are currently producing, shut off the water zones, open up new oil and gas zones and ensure that we have an increased production from these 2 wells. We have made meaningful progress on resolving our HPCL issue, albeit that there were delays in the offtake by road. But that said, the offtake continues, and we are reselling the crude to third parties. Moving to B15, which is the new block which has been awarded to us. The FDP is under preparation. We are looking at all concepts. We are evaluating 3 or 4 concepts at this stage. One of them includes connecting to the existing ONGC's platform to reduce our capital costs. So all of that is being worked now, and we'll do the drilling in FY 2028. The reserve levels are 16 MMBOE, which will be reappraised after we have done some more processing and after the first well, we are hopeful that we'll see an upside. At PY-1, which is in our East Coast, the platform, the 3 wells, we have suffered serious production loss -- and now we are in discussion or we have already awarded a contract for rigless intervention on the wells, which will increase production from these wells in the short term before we come back and drill 2 new wells. Now the drilling of those 2 new wells, while we had planned for quarter 4 of next year, they have become contingent upon the ability of the gas buyers, IOCL, GAIL to lift our gas because otherwise, we will have sat on these new wells, having drilled them, ready to produce. And if we keep them shut for x number of months, they will again be watered out. So this time, we are trying to get it right. As far as possible, we'll have a take-or-pay agreement either with GAIL or with IOCL and only then we will spud the wells. So that's the intent that we have, we are going ahead with. But in the interim, we're doing the rigless completion to increase production from PY1. Now let's get back to get to the onshore portfolio. So we have Dirok in Assam, highly prosperous field. We are the operator with 27-odd percentage in the field. There isn't a reservoir in India and in large parts of the world where your production header pressure from 6 wells is 3,000 psi. That speaks to the prospectivity of this reservoir. But that said, we are producing only 60% or 70% or 50% of the capabilities from the existing well stock because of the lack of evacuation route. Now stuff has happened in the evacuation route improvement. I think the PNGRB has made the DNPL line as a common career. Earlier, it was a captive of NRL of Big Oil India. But now it's -- I mean, of course, operated by AGCL. -- but now it is a common career. There were some areas on some sections in this pipeline, which had degraded and therefore, the overall capacity of the pipeline has been reduced. So they have laid pipelines along the main pipeline for sections which are -- which have seen asset integrity challenges. They have to tie back into the main pipeline. They are looking at hot tapping to tie back and get back the total capacity back to 2.5 million standard cubic meters from the current degraded capacity of 1.1 to 1.5 mMScmd. So that work is being done by Assam Gas Company Limited, and we are in discussions with them just to be there to support with any technical requirements that they may have on this hot tapping. Coming to Khatrang, we had successfully completed 9 wells program, and we doubled the production from last year. But we haven't rested there. We have continued to do workover on a few of the wells. We have now -- we have 23 additional wells there were set for Dow production, and we have been working over on them. 5 or 6 workovers have been completed. Again, we are incrementally increasing production. We are also getting ready for the second phase of 9 wells. The rig has been identified. The award is imminent. We are looking at tubular. We are ordering the tubulars, which should be there in 1 or 2 months' time. And then we should be good to go for our second phase of drilling in kharsang. The problem remains that if we find gas, then we don't have a buyer. And in fact, we have filed virgin gas on 2 of the wells in Kharsang. That's a good problem to have. But only thing is it delays the monetization of the reserves because we don't have a pipeline. So we have started a pipeline route survey as we speak. The tender is out. It will close tomorrow. And then we will have parties to start the route survey. There is a challenge there as it goes through a forest area. So regulatory clearances might be an issue. But given where we are and the confidence that we get to the environmental teams and to the forest officials about not disturbing the flora of the forest, we should be able to navigate this regulation and should be able to start laying the pipeline in 6 to 8 months' time. So that will then connect us to a continuous gas flow path that Oil India has already created, and that will help us monetize the Kharsang gas molecules. Oil, we are already selling to the Doi refinery to various buyers, mostly IOCL. So coming to Gujarat, in Cambay basin, we have A, Balol and Pal. TVs in Balol, we have started a new technology, which is a belt technology where the belts goes down and soaks up the oil and comes up and we squeeze out the oil. That new technology has been implemented. It is in the trial phase. And then we have also debottlenecked our Palej facility to be able to increase production by using thermonic heaters and those kinds of things. So overall, 20% to 30% increase in production, we will see going forward, although we have already seen a 5% to 6% increase in the last quarter, but more to come. Palej has a lot of potential. We have to drill new additional new wells. We have also ordered sucker rod pumps. So we are on track to increase production from our Tam assets. A new block, which has to be given to us for exploration is in the final stages of approval. Once that happens, it's close to our Palej field, we'll be drilling new exploratory wells as well. So that is the long and short of our portfolio. And we are on track to both grow value, create value as well as preserve value for our organization and for you, shareholders. So with that, let me stop, and I'll hand over to Alan for a quick 2 minutes, 5 minutes update on the financials, and then I'll be very happy to take questions.

Thanks, Baroruchi. I will now take you through the financial and operational performance of the company for the quarter. During the current quarter, the company recorded stand-alone revenues from operations of INR 117.5 crores compared with negative of INR 194 crores in the previous quarter. After accounting for profit petroleum and revenue share of INR 9.83 crores, the net revenue stands at INR 107 crores, INR 107.6 crores -- the previous quarter was impacted by the reversal of the HPCL sale of INR 259 crores, as we are well aware. The consolidated revenue from operations for the quarter was INR 124 crores. And after profit petroleum and revenue sharing, the net consolidated revenue stands at INR 114.17 crores. The improvement in the current quarter, as Baroruchi has mentioned, was driven by higher production from the Kharsang field, mainly crudes and favorable Brent prices. This was augmented by the commencement of the liquidation of the B-80 crude, although at a slower-than-expected pace. Even from an operational perspective, the production from Kharsang has been most encouraging, where production increased from approximately 12,300 barrels of oil to 17,400 BOE. The average realization of crude and condensate improved significantly to about $95.5 a barrel compared with approximately $70.8 per barrel in the previous quarter on a stand-alone basis. In addition, the average gas price realization improved to $12 a barrel to MMBtu compared with 9.8 MMBtu in the previous quarter. So quarter-on-quarter, price changes and the volume changes from Kharsang has delivered a really good top line. Coming to profitability, the stand-alone profit before tax and exceptional item was INR 12.54 crores for the quarter compared with INR 30.4 crores in the previous quarter. This is mainly due to the offset to cost from higher inventory of crude in the previous quarter. As you know, the previous quarter, we reversed out the sale from HPCL and hence, that resulted in a higher -- in a lower cost offset to the overall operating cost. On a consolidated basis, the profit before tax and exceptional items was INR 6.5 crores compared with INR 9.01 crores in the previous quarter. The other income for the quarter was INR 19.3 crores on a stand-alone basis and INR 20 crores on a consolidated basis. The stand-alone other income includes the release of a long due escrow balance pertaining to cost recovery of approximately INR 8 crores, income from an insurance claim, which was admitted by the insurance company of INR 2 crores and topping up of the Adut acquisition as at March of approximately INR 2 crores -- INR 2.3 crores. The movement of profitability needs to be viewed in the context of the quarter's cost structure, mainly the impact of changes in inventory of crude, which is stored in tankers and not sold till the appropriate time. Stand-alone total expenses for the quarter at INR 114 crores included depletion of INR 51 crores, royalty and other statutory dues of INR 13 crores and stock adjustments of INR 41 crores. On a consolidated basis, the total expenses were INR 128 crores with costs, including depletion at INR 58 crores, royalty and other statutory views at INR 15 crores and stock adjustments of INR 41 crores. The consolidated statements include the 10% GioNpro sales from Kharsang. As we look ahead, our focus will be cost reduction and cash management to ensure, as Baroruchi said, the allocation of funds to maximize full potential of the existing reserves. Thank you, and I will hand it back to you, Saloni. I think with that.

[Operator Instructions]Our first question comes from Dhruv from [indiscernible].

My first question is that what is the current status and expected time line for the Northeast grid connectivity that depends on? Is the pipeline interconnection actually complete now? Or is it still pending? And once it's ready, by when do we expect kind of like ramp to the decent levels?

So our take is that by December, this should be completed. The Assam Gas Company Limited, which operates the pipeline is in discussion for hot tap to be carried out. And then in the NRL, there is 100-odd kilometers -- 100-odd meters of pipeline which has to be done. That also needs a hot -- we are told that by December, all of this will be completed because right now, after the hot tap option has become available, NRL shutdown is no more needed. So it is roughly 16 to 20 months lead time for hot taps. So that work is going on with the Assam Gas company. So December is what we are looking at.

Okay. My second question is regarding what's your view on B-80 currently? How is the production and monetization progressing given the HPCL dispute? And when do we expect the issue to be resolved?

So if you mean the B-80 crude, which is stored in HPCL tanks commingled with their crude, we are in -- the sale continues through tankers to third parties. We have reversed the sale, as Alan said, in March, April of this year, and we agreed to sell it to third parties. The speed at which is being picked up by the third parties is slower than expected, but we hope that by end of October, early November, the entire crude inventory will be gone from the HPCL refinery in Chembur and Mumbai.

Next question is from the line of Shubham Jain from [indiscernible].

My first question was how much was the impact on the P&L because of sort of mark-to-market losses on the inventory that we are holding?

So the jury has to still come back home. We are in the process of selling it, and it is dependent upon the Brent price. So we have sold roughly 15% of the crude as we speak and the realization has been -- we have incurred some losses, which is an range of INR 4 crores to INR 5 crores, maybe INR 6 crores. But we still have to go with the remainder of the crude, which is now picking up as the monsoon bears out. So we will suffer a loss. Now how much? I would put my number to around 7% to 10%, but please don't take it as a guidance.

And if I adjust for this number in this quarter's number, what would the EBITDA have been?

EBITDA...

Yes. So we've done a INR 6 crores EBITDA and there is a certain adjustment that happened because of the inventory level. What would the EBIT have been these adjustments?

Okay. Let me come back to you on that because I don't want to give you -- -- it's a bit of a technical issue because there is inventory adjustment, there is profit petroleum adjustment. There's a cost -- there's a sale adjustment, okay?

Understood. My second question was how is the sort of that you want to...

Can you speak slightly slowly? We couldn't hear you. I mean you are not clear.

Sorry, I hope I'm clear now. is the sort of alignment of rigs happening for the workover plus the new wells that we want to in BA0?oready have it in place? And sort of are we on track to complete it by 3Q and 4Q '27, respectively?

Yes. So we'll start -- so if you're wanting to understand about the campaign, this is a single campaign that we will be looking to deliver. The first one would be 2 workovers, which are in the range of 10 to 15 to 20 days each. And then we'll have 3 wells, which would be in 30 to 40 days each. And that will take us towards the end of March, early April and then we'll install a jacket on it and a production deck. And on that basis, we will start production. Now these are offshore wells. stuff happens, sometimes the tubing gets stuck and so there could be delays. So we are -- but the plan remains that by June of next year, we'll bring 3 wells on production. And by November and December of this year, which is 2026, we will have 2 wells that we have worked over on production.

[Operator Instructions] Next question is from the line of Ritesh Gandhi from Discover Capital.

So I just had a few questions. We've obviously had a long delay in terms of Assam with regards to -- for the last -- I mean, 2 years, it's been a few months away, right, with regards to starting. Just want to understand what's giving us the confidence now? And just wanted to understand what are the actual risks involved with regards to Assam connection -- connectivity to the national grid.

It's a very good question. So the current circumstances have forced issues with the stakeholders. because the country needs gas, there's supply chain disruptions, energy security has become a big thing. So there has been a lot of push from all stakeholders to align and get this done. And to that extent, the PNGRB has hasten to ensure that the line which would carry the gas is no more a dedicated pipeline. It is a common career where anybody can pump the gas if there is demand. So that aspect is taken care of. The other aspect was the degraded sections of the DNPL line had to be replaced to increase the capacity. So those lines have been laid. Those sections of lines have been laid. Now it is just a matter of tying back to the original line so that the capacities can be increased and the pressures can be increased. That was earlier dependent upon NRL shutdown because to be able to cut the line, you would have to empty the entire pipeline, depressurize it, flush it with nitrogen and that would mean 7 to 10 to 15 days of shutdown for the Numaligarh refinery. In discussions with Assam Gas Company Limited, many stakeholders, including us, we have been able to convince or we have been able to discuss that hot tapping could be a solution for ensuring that NRL does not have to take a shutdown. In fact, for hot tapping in a pipeline, you actually have to produce gas, continue to flow gas so that the heat can be dissipated. So Assam Gas Company Limited has taken on this concept. They are in the process of award of the hot tapping contract. We have been in discussions with them to provide technical support although we are not directly connected, but just as a responsible stakeholder, we have been in discussions with Assam Gas Company to provide support on the technical support that they might need on the hot tab. So that gives us a level of confidence. But and it could have started a bit early, the tender, et cetera, but floods have made a lot of disruption in Assam as we speak. Things are getting back to normal. And in talking to the service providers of the hot tab, they are saying 16 to 20 weeks. And although they are trying to bring it forward now. So we are hoping that in December, the hot tabs will be completed, and we should be able to get higher capacity in these lines and then be able to flow to the national gas grid.

NRL has been refusing to take a shutdown for the last few years, is it? Because I mean that's the easiest solution which was there, right?

Also it would not be fair for me to say that they have been refusing to take a shutdown. It is also dependent upon whether they are allowed to take a shutdown given the shortage of products, et cetera. So there are multiple things that play there, and I will not be the right person to comment. But long story short, the shutdown was delayed. And we agreed with Assam gas company, they were looking for options, and we discussed that hot tap could be an option. And on that basis, they are pushing their progression.

Got it. Sir, and the other question -- similarly with regards to BAT as well. We've done a number of reworkings over the last few years, right, whether it was having the chemicals brought in and all of the equipment, et cetera, over the last few years. Now again, there appears to be another solution here. What's again giving us the confidence that it's going to work this time around when -- I mean, historically, it hasn't. And just wanted to understand what would give us the confidence that there isn't anything structurally wrong within BAT and that it's actually fixable?

That's a good question. In the oil and gas sector, we have to continue to pursue production so long as we have a level of confidence that the recoverable results are still in the ground. In India, we don't have an ecosystem where you can make a phone call and get a vessel to do work on a subsea completion well. And these 2 are subsea completion wells. So stuff has been tried in the past where we have used chemicals to shut off water zones, et cetera. Some of it has worked, some of it haven't, but now we are getting a rig to be able to completely shut off the water zone through rig intervention. And so the level of confidence in making an improvement, making an improvement towards higher production is high. We will have to do re-purporation, et cetera, because the flexibility to operate increases if you have a rig on the well. And these are subsea wells. So you can't -- if you did a dry Christmas trees on a well platform, you could have brought a coil tubing like we are doing in PY1 or a wireline and would have done stuff inside the well. But these are subsea wells and to be making -- and to be able to make an intervention in these wells, physical intervention through a tubing, et cetera, to change zones, to reperforate new gas and oil producing straight, you need a way. And that's what we are getting now. We believe our 2P reserves are still there at 26 million, of which 1.5 million, 2 million has been produced so far. So there are reserves to be produced. So we are giving it our best shot. We are planning properly, and we hope that we will be able to minimize the risk. risks are always there in the oil and gas sector. We are hopeful that we'll minimize the risk and recover our investments with very good margins after we do this work.

Got it. Sir, the other question was in your latest investor presentation, we seem to have increased our CapEx budget from the Q4 presentation. Is this because of escalating the costs? Or is it because of incremental opportunities that we are pursuing?

So at this stage, unless we have awarded the rig contract, we always have to have a contingency. The rigs have come in very short supply now. As the oil prices increase, everybody wants to drill. So we have to have some increases in the contingency. And it is not that whatever we have said as a CapEx will be spent, that is the kind of facility that we will be creating and the drawdown on the facility on a need basis. After doing these 2 workovers, our own cash flows will also improve and a part of that would be funded out from our internal cash flows. But just to be cautious, we are going into the market. We are talking to the investors and to the banks to be able to raise a part of money, which will allow us to do the workover and the 3 wells and bring them on production unhindered from a cash position.

We have our next question from the line of Ankit Arora from Arora Wealth Advisors.

Sir, one clarification first, Mr. Andrade You mentioned that we realized $12 on the gas side. Now this is blended realizations across BAT and Dirok?

Yes. This is blended across both.

Sir, just a request in the previous presentation, we used to give asset-wise realizations on the gas and oil.

Yes. Yes.

And it will be good if we can continue that practice because I believe that BAT is IBX related and then on Dirok side, we have the PPA pricing and the blended realizations kind of make it a little difficult to model, especially when Dirok will -- in next few quarters will start scaling up, it will help us to model it a bit better on how Dirok will start contributing. So I mean if you can continue that practice, that useful.

Point well taken. We will, in our next presentation, make sure that we include the offshore and onshore realizations as well so we can get an idea of what individual fields are realizing. But please remember that the BAT gas, which is produced is traded on the exchange, and we realized approximately about $15 to $16 per MMBtu. -- on that exchange. The other prices at Dirok and PY-1 are pegged at sometimes 10, sometimes 12. So it's a blend. That's why it's a little difficult to tell you what exactly it is. But we can certainly -- we've got that information. We can provide that without a problem. Sorry, just to add, I mean, it's -- we have a JV obligation to report these figures. So every joint venture has quantitative information as well as sales information. So it's not difficult to pull that figure out. So we will make sure that all the investors are provided with that information as well.

The other question was on the BAT since it is a monsoon time right now, is the production still ongoing?

Yes, production is ongoing. No, it is ongoing. We have never had a day where we shut the production, although we had to do some things related to asset integrity in the one on one of the wells, we had very severe corrosion, et cetera, which we had to figure out. And one of the wells have a very high water cut. And by itself, it would have produced very little. So we have reconfigured the compression. So from parallel, we have gotten them into series so that they can set higher at a lower suction pressure. So the production continues, albeit that it is partial at this stage, probably towards the end of the month, it should be completely 100%.

Just to add, I think you asked the question about the average price realization. If you -- I mean, I hate to make you do this, but if you want the BAT realization on an average is $16.5 per MMBtu. The Dirok is $12.5, compared to that. Can you say that again, $16.5 for BAP? Yes. And the Dirok was $12.5.

And sir, Yes. So sir, on the BNPL side, just to understand what you described about NRL and shutdown. So the sequence of events from now on because this was also mentioned in the Oil India con call. So I think BNPL is now a common carrier, but there is a 200-meter pipeline gap, which needs to be done where ICL to connect ICL and BNPL. And then once that is done, then we will go for the BNPL capacity augmentation, whatever the degradation has happened, we will do the hot tapping and then at the end of December, we to flow from DNPL to -- is that?

Yes. So it is in parallel. The point is -- I mean, you have made the right point. The only thing is BPCL are working on -- there is no dependency on the hot tap and the NRL, there are 100, 150, 200 meters of pipeline, which has to connect the DNDL to the gas grid inside NRL's facilities. And that's a very -- that is not such a big thing. The main thing is this hot taps. So they are continuing to work on the hot taps now. And at any suitable time, this 150 to 200 meters of pipeline will be laid inside NRL to connect DNPL line, which enters the gate of NRL to the exit where it -- it connects with the gas grid. So that shortcut bypassing NRL is in the gift of NRL to do it at any time. It should not be such a big problem. The big thing is some of these hot taps are in the middle of the fields, paddy fields and they have water, et cetera, in them, which has all been now -- which have all been planned now and the awards are imminent and the vendors have gone and seen have submitted the procedures. So that is the critical path, if you will, for start. And of course, this 200 meters of pipeline, as our India told you, is absolutely necessary, but that is within the premises of NRL. And as you can see, 200 meters grind is not a very big thing.

Yes. And one last thing on the BAT. in the last investor call, we had about -- asked about the storage that we have already 118,000 on the FSO. Now you had mentioned that we can technically sell it, but there are [indiscernible] charges that will come into picture. And therefore, we have to take that into account if we want to sell what we have currently in our FSO. Now I mean -- and you also mentioned that we are looking at how we can do that. So is that still...

So in October, we'll sell. In October, we'll have sufficient volumes for a small tanker to be able to take it and we'll be able to sell, but that would be around 120,000 to 130,000 barrel of crude we'll be able to sell in October. Because if you have lower volumes and you send the large tankers, those tankers ask for charges and there is some debt volume which remains. So it is not an optimal number, 120 to 150. We are looking at smaller tankers. And in October, as soon as the monsoon gets over, we will sell. Let's say, the oil price

We have next question from the line of Nishant Maheshwari, an individual investor.