deep energy resources ltd share price Management discussions


Indian Oil & Gas Exploration & Production Industry

The Global Oil and Gas (O&G) producers had a robust but volatile FY 23. Indian Oil & Gas producers were no exception to it. At the start of the year strong energy demand was expected as the economy continued its recovery from the global pandemic. However Russia-Ukraine conflict introduced huge geopolitical uncertainties and caused energy priced to soar. This has only strengthened the intent of the nations across the world to further bolster the Energy Security and Self Sufficiency while transitioning to greener sources of energy in the long term. The trident of Energy Security & self sufficiency, Supply chain diversification and transition to low carbon energy sources is in focus like never before.

Figure 1: The Energy Trilemma

Energy Security

Reflects nations ability to meet current and future Energy demand reliably and affordably

To withstand and bounce back from systems shocks with minimum disruption to Energy supplies

Energy Transition

Energy Diversification

Transition of countrys Energy system towards mitigating and avoiding potential environmental harm and climate change impacts

Dealing with concentrated demand, production and supply and trade of Energy resources

India is now worlds third largest energy consumer and is expected to grow its energy consumption at thrice the speed as compared to rest of world by 2040. Further 25% of global energy growth between 2020 and 2040 is envisaged to come from India due to its fast growing economy backed by favorably placed demographics.

India is also a fourth largest importer of LNG (Liquefied Natural Gas) and currently imports large quantities of LNG to support its overall natural gas consumption. India has got abundant reserves of Natural Gas, largely untapped. Natural Gas as a source of energy is greener and still cheaper. Government of Indias aim to increase the share of Natural Gas in primary energy basket from current 6.5% to 15% by 2030 opens up the doors for huge opportunities in natural gas domain. The shift towards natural gas will not only bring in larger share of greener energy but will also carry remarkable economic and strategic significance as India targets to stay on multi-year growth trajectory and need to harness the gas reserves to feed to the growth. It also saves us huge foreign exchange resources for us and helps increasing our energy independence in a significant way.

According to IEA (India Energy Outlook 2021), primary energy demand is expected to nearly double to 1,123 million tonnes of oil equivalent, as the countrys gross domestic product (GDP) is expected to increase to US$ 8.6 trillion by 2040. Robust energy demand, focus on energy self sufficiency coupled with proactive reforms in energy policies sets the brighter outlook for Indian Oil & Gas Industry in the years ahead.

Industry structure and developments in Natural Gas Domain

The Oil and Gas industry is typically split into three segments mainly - Upstream, Midstream and Downstream.

Opportunities and Threats

The Natural Gas Opportunity in India

- Indias Natural Gas consumption is~174 mmscmd. Of this around 49% is met through domestic production while the rest is through import in form of Liquefied Natural Gas.

- Indias Natural Gas consumption is expected to reach around 550 mmscmd by 2030 of which ~380 mmscmd is expected to be coming from domestic production.

- India targets to increase the share of Natural Gas in the countrys energy mix from 6% to 15% by 2025. Global Average is around 24%

- India holds the Natural Gas reserves of 1,339.57 bcm.

- $60 bn investment planned in Natural Gas Infrastructure of the country by 2030 including expansion of pipeline network to 30,000 km. by 2025 and 10,000+CNG stations by 2025.

Why Natural Gas? Why CBM?

Cleanest Fossil Fuel: Natural Gas is cleanest of all fossil fuels and the best energy choice for the clean environment. During utilisation of Natural Gas, the emissions are very low as compared to the alternate fuels like coal, Fuel Oil, Naphtha, Petrol, etc. Natural Gas is pre-dominantly made up of Methane (CH4) and results in lesser carbon emissions. Natural Gas burns cleaner without leaving any smell, ash or smoke.

Global Energy Transition Trend: Natural Gas is increasingly seen as a source of energy assisting in a global transition trend towards low carbon / carbon neutral and sustainable energy supply. Natural Gas is gaining ground as an important contributor to the Indian Energy mix and is capable of ensuring affordable, clean and sustained energy supply.

Coal Bed Methane (CBM) extraction helps in producing cleaner energy from coal as the Natural Gas is extracted first preventing the release of the Natural Gas into atmosphere while coal mining. The technology also enables the relatively safer and cheaper coal extraction later on from the same field and results into duel monetization from the same field. India has fifth largest coal reserves in the world and hence great potential for CBM exploration and production.

Figure: 2 Advantage India – Drivers to the growth of Industry

Threats

The deployment of skilled human resources and harnessing of technology has becoming increasingly important. Timely execution of the development plans and monetization of the gas assets remains critical for the growth objectives to be achieved.

The fortunes of the exploration & production business are largely tied up with the buoyancy of gas prices and stability in pricing regime.

Strategy of the company

The Company and its subsidiary companies are holding large acreage of onshore exploration & production assets in both conventional and unconventional category. Out of 10, 4 assets are in development phase, 3 assets are in exploration phase and 3 have been relinquished. DERL holds 25% stake in North Karanpura CBM block through its subsidiary Prabha Energy Private Limited (PEPL). This asset is in development phase. PEPL is the joint operator of this asset along with ONGC and IOCL is the third partner. PEPL also signed a Revenue Sharing Contract with BCCL for exploration, development and production of CBM gas from Jharia CBM Block I. PEPL holds 100% stake for development of this block. The Company has a strong management team with decades of experience in oil & gas and CBM development businesses.

The Company is currently focusing on developing the CBM Gas Assets portfolio through its subsidiary – Prabha Energy Private Limited. Along the lines, the company has started engaging in trading of Natural Gas. This activity is carried with strategic intent since it greatly helps in establishing natural gas market connectivity, brings familiarity with industry norms and builds important supplier – client relationships. It better positions the company within the entire eco-system of natural gas market when the commercial production of natural gas starts from the gas blocks in future.

Performance and Progress of the CBM Gas Assets.

North Karanpura CBM Block:

North Karanpura CBM block was initially awarded to the consortium of ONGC & IOCL during first CBM bid round in 2001. ONGC had completed drilling of 9 core holes and 6 test wells during the Exploration Phase I & II. Exploration work by ONGC had indicated good CBM reservoir parameters like coal thickness, gas content, saturation levels and permeability. Gas-In-Place (GIP) for the development area is about 22.93 billion cubic meters (BCM) of gas. Field Development Plan was approved by the Government of India in 2012. The statutory clearances like environmental clearance, mining lease and other approvals has been granted by the government. In the Year 2015, ONGC through international competitive bidding process awarded its 25% participating interest and operatorship to Prabha Energy Private Limited (PEPL) Thereafter, PEPL started further developmental activities in the block wherein a total of 74 wells were planned to be drilled.

The initial developmental activities have now been completed. The wells drilled and completed so far have shown good CBM gas production. Most of the wells have shown the gas during production testing. One of the well has shown initial gas production of about 12,000 standard cubic meter per day (SCMD) during initial dewatering of well which is very positive.

Further steps are being taken to start commercial production from the North Karanpura Block as well as towards selling small quantity of CBM gas from the block. For this, Gas Sales Agreements have been signed with few buyers. Volume of gas to be sold will be around 25,000 SCMD and the gas will be transported by the buyers using cascades. Infrastructure development for gas off-take is also being developed.

The National Gas Grid is 68 kilometers away from North Karanpura block. Petroleum & Natural Gas Regulatory Board (PNGRB), after competitive bidding process, has now awarded the contract to Indian Oil Corporation Limited (IOCL) for laying the gas pipeline for connecting NK CBM block to Jagdishpur-Haldia-Bokaro-Dhamra Natural Gas Pipeline (JHBDPL) which is part of National Grid.

Jharia CBM Block I

Jharia CBM Block I was awarded to PEPL in September 2021 as a CBM Developer with 100% Participating Interest through international competitive bidding process by Bharat Coking Coal Limited (BCCL) – subsidiary of Coal India Limited. Environmental Clearance (EC) for exploration phase has been granted by the State Pollution Control Board (JSPCB). Initial survey activities have been completed. Locations for exploration phase work program have been identified. Lands required for drilling of core holes and test wells have been acquired. The Work Program & budgeting exercise has been completed and the procurement of goods and services have commenced. The Tenders for Core hole drilling rig, testing rig and other long lead equipment & materials have been floated.

Discussion on Financial Performance with respect to Operational Performance and Key Financial Ratios

Key Financial figures on standalone basis: (in INR Lakhs)

Particulars

FY 2022-23 FY 2021-22
Revenue from Operations 1,490.28 43.43
Other Income 175.22 0.29
Total Income 1,665.50 43.72
Total Expenses 1,294.93 40.13
Profits Before Tax 370.56 3.59
Profits After Tax 279.47 3.19

 

Key Financial figures on consolidated basis: (in INR Lakhs)

Particulars

FY 2022-23 FY 2021-22
Revenue from Operations 3,345.29 265.48
Other Income 30.46 21.86
Total Income 3,375.74 287.34
Total Expenses 3,064.42 233.45
Profits Before Tax 311.33 53.89
Profits After Tax 216.21 46.13

Revenue from Operations

Revenues from Operations were Rs 1,490.28 Lakhs on standalone basis and Rs 3,345.29 Lakhs on consolidated basis. The revenues were largely derived from dealing in Natural Gas i.e Natural Gas Trading activity- engaged in with strategic intent.

Operating Expenses

Operating Expenses on standalone basis has been Rs 1,200.79 Lakhs and Rs 2,373.08 Lakhs on consolidated basis. The operating expenses are largely consisting of costs incurred on account of purchase of natural gas for trading purposes and other costs associated with it.

Other Expenses

Other Expenses have been listed in table below:

Particulars

FY 22-23 (Standalone basis) FY 22-23 (Consolidated basis)
Employee Benefit Expenses 7.63 141.60
Finance Cost 0.54 28.34
Depreciation & Amortization 6.94 31.40
Other Expenses 79.03 102.80

Total

93.60 304.14

DETAILS OF SIGNIFICANT CHANGES IN THE KEY FINANCIAL RATIOS & RETURN ON NET WORTH

Pursuant to Schedule V Para B Clause (1) (i) of the Listing Regulations, Please find below details of Significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in Key Financial Ratios along with detailed explanation therefore.

Financial Ratios

FY 23 FY 22 Change Explanation / Remarks

1. Debtors Turnover Ratio

62.28 3.39 1,736% Expedited collection mechanism. Also trading activity has a faster cash conversion of trade receivables.
2. Debt Equity Ratio N.A N.A N.A Not Applicable as there is no external debt.
3. Return on Net worth( Please refer note 1) 4.33% 0.05% Better utilization of assets.
4. Inventory Turnover N.A N.A N.A Not Applicable as there were no inventories.
5. Interest Coverage Ratio N.A N.A N.A Not Applicable as there is no external debt.

6. Current Ratio **

2.53 1.61 Larger proportion of short term assets relative to the short term liabilities.

7. Operating Profit Margin (%)

13.14% 8.17% This is due to better revenue mix whereby large share of revenues revenue came from activities with better operating margins.

8. Net Profit Margin (%)

16.78% 7.30% This is due to better revenue mix whereby large share of revenues revenue came from activities with better profit margins.

Note 1

Return on Net worth is calculated on average net worth and is on Ex-Goodwill basis.

RISKS & CONCERNS

1. Tapping of skilled Human resources

2. Lower / Volatile Natural Gas Prices

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has built adequate systems of internal controls to safeguard all assets against loss from unauthorized use or disposition as well as ensuring the preparation of timely and accurate financial information. Regular internal audits and checks are carried out to provide assurance that adequate systems are in place and that the responsibilities at various levels are discharged effectively.

HUMAN RESOURCES & DEVELOPMENT

The Company values its Human Resources most and continued in its endeavors to ensure work-life balance of its employees. The Company believes that employees are the key to achievement of Companys objectives and strategies. The Company provides to the employees a fair and equitable work environment and support from their peers with a view to develop their capabilities leaving them with the freedom to act and to take responsibilities for the task assigned. We provide our employees outstanding career development opportunities and reward to the staff for their good performance and loyalty to the organization.

In order to meet steady flow of talent, Company has appointed experienced professionals in Technical as well as Commercial Departments. Apart from that, as a strategic policy, every year, Company hires new pool of talent from reputed Technical / Petroleum Institute through campus selection process. Other than Key Managerial Personnel, there were no any other employees in the Company as on 31st March, 2023.

HEALTH, SAFETY & ENVIRONMENT

Being a service provider to high risk industry, safety of employees is utmost priority of our Company. While carrying out operations, Company ensures compliance to all Rules and Regulations regarding Health, Safety and Environment protection. Imparting essential health and safety training such as MVT, Firefighting etc is being followed on regular basis.

CAUTIONARY STATEMENT

Statement in Management Discussion and Analysis may be forward looking within the meaning of applicable securities laws and regulations. Many factors may affect the actual results, which could be different from what the Directors envisage in terms of future performance and outlook.

The Company assumes no responsibilities in respect of the forward looking statements herein, which may undergo changes in future on the basis of subsequent developments, information or events.

For and on behalf of the Board of Directors
Deep Energy Resources Limited

Date : 11th August, 2023

Premsingh M. Sawhney

Place : Ahmedabad

Chairman & Non Executive Director
DIN:03231054