Surged 168.19% In 1-Year, Buy This Oil & Gas Stock Says HDFC Securities

Hindustan Oil Exploration Co. Ltd is a small-cap oil and gas company with a market capitalization of Rs 2,777.11 crore. The stock has risen 168.19 percent in the last year, from Rs. 79.85 on January 28, 2021 to Rs. 215.05 on January 28, 12:31 IST. HDFC Securities has issued a buy call on the stock with a target price of Rs. 274 and predicts that the stock will achieve its target price in 6 months from its current market price.

Key investment rationale for Hindustan Oil Exploration Company Ltd. (HOEC) according to the brokerage

• Transformation of B-80 block in Mumbai basin is on the final stage and operational activities could commence soon. B-80 is an offshore discovered field and HOEC is engaged in development of this site and the field is jointly owned by operator HOEC 50% and Adbhoot Estates AEPL, 50%. We expect, first oil sale revenue could start from Jan/Feb 2022. Apart from this, the company is hoping to increase its production potential from 2000 boepd to 8000 boepd going forward and if this is realised, HOEC could see huge potential to generate incremental revenue going forward.
• Dirok gas field is located in Assam-Arakan Basin and the block is currently being operated by Hindustan Oil Exploration Company (HOEC), along with JV partners Oil India Ltd (OIL) and Indian Oil Corporation Ltd (IOCL) under a Production Sharing Contract and producing 35 mmscfd of Gas. After completion of Phase II, the management expects to increase its production to 55 mmscfd in FY23 from 35 mmscfd. Post that, the drilling of 3 wells the company is targeting 75 mmscfd thereafter. Public hearing has already been conducted successfully for phase-II execution. The company is laying of 35km pipeline to connect directly to Duliajan hub. Environmental clearance for the same has been obtained.
• HOEC is drilling 18 new wells at Kharsang, Arunachal Pradesh. Post drilling the production capacity will be increased to 1800 boepd.
• HOEC plans to carry out drilling program at its two onshore Cambay blocks in Gujarat for a proposed project cost of Rs 345 crore. HOEC shares the blocks with Gujarat State Petroleum Corp (GSPC). HOEC plans to drill four infill wells and six development wells at Asjol and proposes drilling of 16 development wells in the North Balol block. The initial oil estimate in the Asjol oil field is about 10.7 mn barrels.
• The company plans to take advantage of existing infrastructure while growing its operations organically or inorganically, and strives to add attractive assets with synergies to its current asset portfolio. With its portfolio of gas resources both in North East and in Southern Regions, HOEC is well positioned to leverage the opportunities presented by this transition to a gas based economy.

Buy With A Target Price of Rs. 274

HDFC Securities has said in a report that "HOEC portfolio comprises 10 Oil & Gas blocks of Discovered Resources and 1 exploratory block, all of which have resources with some upside potential. The company has sufficient capital to implement its business plans and to continue the development of the Dirok field in Assam, revisiting the development of PY-1 field, B-80, Kherem and other fields. B-80 and Dirok are the main producing assets for the company. The expansion program in B-80 is likely to be done after the first oil from B-80 & full commercialization of added exploration from this site is likely to be operational in FY23E. Over the next two years, the company expects a significant ramp-up in volumes which would ensure growth visibility going ahead on account of rising production in B-80."

According to the brokerage "Taking the advantage of favorable government policy, E&P operators can participate in e-bidding and has right to set own price above Govt. notified price. Currently, (from Oct 01, 2021) prevailing APM Gas price is USD 2.90 per mmbtu. Given strong management, a robust balance sheet and stellar growth are expected over the next two-three years. We believe the base case fair value of the stock is Rs 238 (6.75x FY24E EV/EBITDA) and the bull case fair value of the stock is Rs 274 (7.75x FY24E EV/EBITDA) over the next two quarters. Investors can buy in the Rs. 208-212 band and add further on dips in the Rs 174-178 band (5x FY24E EV/EBITDA). At the LTP of Rs 210, the stock is trading at 6x FY24E EV/EBITDA."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.