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B-80 field set to provide sustained CFs for further developmental activities…

About the stock: Hindustan Oil Exploration Company (HOEC) is India’s first private player in the upstream oil & gas sector.

• HOEC holds a portfolio of 11 blocks with eight onshore and three offshore blocks of which it has operatorship in 10 blocks

• In FY23, standalone revenues were at | 381 crore, up 192% YoY, due to commercialisation of B-80 block in Mumbai Offshore and better realisation from Dirok field. Standalone EBITDA came in at | 195.3 crore, up 158% YoY. The company reported a PAT of | 178.5 core, up 398% YoY

Key triggers for future price performance:

• All portfolio assets under revenue mode: HOEC focuses on discovered oil & gas assets to reduce risk related to exploration. Its portfolio assets (B-80, Dirok, PY-1, Kharsang, Cambay) are all under revenue mode and developmental drillings have been planned to improve production from individual wells (PY-1 in FY24, then proceed with drillings in Dirok, Cambay, B-80)

• Stabilisation of B-80 well: While B-80 would contribute bulk of profitability for HOEC, the well is being optimised to prolong the plateau of the field life and keep government share to one-third, which would lower cash flow volatility, going ahead. Currently, the gas: oil ratio is declining and thereby would improve product mix for the company in the medium to long term

• Capacity improvement in other assets: Dirok is being connected directly to Duliajan hub via 35 km pipeline and together with drilling of three developmental wells is expected to improve gas production from current 35 mmscfd to 55. Other assets like PY-1, 3 Cambay assets (Asjol, North Balol, Palej) contribute marginally to HOEC valuations. The management expects to unlock field potential by executing approved Field Development Planning (FDP) in the next two years

What should investors do? In the near term, the management plans to reduce the outstanding loans from banks from | 250 crore to less than | 100 crore in FY24, by utilising CFs generated due to higher B-80 production. On the developmental front, the company will initially spend | 64 crore to drill wells in PY-1 (in Q4FY24). Then, in the medium to long term, it will proceed towards drilling more wells in blocks like Dirok (post FY24), B-80 (FY26-27), Cambay (post environmental clearance), etc. We estimate revenue, EBITDA, PAT to grow 37%, 27%, 28%, respectively, during FY23- 25E and FCF yield/RoCE improving to 6%,18%.

• We initiate coverage under the Stock Tales format with a BUY rating

Target Price and Valuation: We value HOEC at | 260 per share (based on DCF

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