IRRATIONAL EXUBERANCE
 

Hindustan Oil Exploration''s valuation appears high implying an aggressive earnings growth is already discounted

WITH a beta of 1.6, Hindustan Oil Exploration is a volatile scrip in the petroleum E&P sector. It mainly produces natural gas, but still is valued higher than its oil producing peers. the company plans for expanding production are well under way that can bring in significant future earnings. However, it may not be a good scrip for long-term investors.

BUSINESS:

Gujaratbased Hindustan Oil Exploration is a petroleum exploration company, which owns stake in 10 petroleum exploration blocks in India. The company became a subsidiary of Italian petroleum major Eni in FY08 when it took over HOEC''s promoter Burren Energy.

The company''s current production stands at around 10,000 million barrels of oil equivalent, which is predominantly natural gas. Five of its fields are currently producing, which includes two in development phase and three in exploratory phase. North Balol field in Gujarat and two offshore fields in Cauvery basin ? known as PY-1 and PY-3 ? are the largest contributors for the company.

GROWTH DRIVERS:

The company is currently developing two blocks ? AAP-ON-94/1 in Assam and CB-OS/1 in Cambay basin of Gujarat ? where hydrocarbon discoveries have been made. Both these blocks are expected to commission in phases by FY14. It is also taking efforts to increase production from its existing producing fields. The PY-3 field in Cauvery basin, which is producing since 1997, is undergoing enhanced oil recovery methods to extend its productive life. Similarly, additional drilling is planned in the PY-1 field to increase the production from current 41,500 mmBtu per day. HOEC holds a 21% non-operating stake in PY-3 and 100% stake in PY-1 field.

The gas produced from PY-1 field is currently sold at $3.75 per mmBtu, which is lower to what PSUs such as ONGC and Oil India get after price revisions last year. Similarly, HOEC is pleading with the government to raise gas prices. Any such approval will substantially boost the company''s bottomline.

FINANCIALS:

In the past five years, HOEC''s net profit has grown at a cumulative annualised growth rate of 34.2%, while revenues grew at 28.1%. However, there has been a lot of volatility and earnings growth came in spurts.

During FY11, the company increased its profits by 85% to 81.50 crore as its revenues more than doubled to 345.80 crore. It ended the year with debt-to-equity ratio of 0.55.

The company''s dividend paying record has been erratic. After paying dividends every year till FY06, it has paid dividend only once.

VALUATIONS:

The scrip is currently trading around 31 times its earnings for

FY11. This appears substantially higher than other petroleum exploration companies, including ONGC, Oil India or Cairn India, which trade in a P/E range of 11 to 15.5. All these companies are predominantly oil producers, unlike gas producing HOEC. This means valuation is already discounting aggressive future earnings growth to an extent even from a possible natural gas price hike.

 
Ramkrishna Kashelkar
 
ramkrishna.kashelkar@timesgroup.com