Oil & Gas Exploration and Production (E&P) Industry

Date: 13 th Sept 2008 Oil & Gas Exploration and Production (E&P) Industry Selan Exploration Technology Limited Investment View: Buy CMP: Rs.263.25 Target Price: Rs 327.77 Hindustan Oil Exploration Company Limited Investment View: Sell CMP: Rs.114.30 Target Price: Rs 104 SELAN HOEC Sales (Rs. Cr) 137.3 116.2 EBITDA Margin 69% 68.9% EPS 37.12 5.20 P/E 7.09 22 Estimated Figures We initiate our coverage on two mid-cap Oil & Gas Exploration and Production players with a mixed view of buy & sell on these stocks under coverage. While Selan Exploration Technology Ltd (SELAN) & Hindustan Oil Exploration Company Ltd (HOEC) operates on a similar business model but we believe that SELAN carries less business risk and is better valued as compared to HOEC. This industry in India functions under a Production Sharing regime, in which the Company enters into a Production Sharing Contract with Indian Government for exploration and development of hydrocarbon resources. The Government has awarded and signed a number of Production Sharing Contracts with Private Sector Oil Companies for Exploration Blocks under New Exploration Licensing Policy (NELP) and Coal Bed Methane (CBM) Projects. The latest effort in the industry is regarding NELP VII which shall further expand the industry. The Private Sector with its Joint Ventures has contributed significantly in exploitation of existing oil reserves in the country with the striking of huge discoveries of oil and gas within the country. As a result, the domestic crude oil production is continuously improving with significant contributions of crude production from private operators, thus reducing foreign exchange outflow on crude imports. Oil sector today is one of the most prospective sectors where newer growth avenues for business and employment are opening up, even though import of crude oil represents India s single largest item of import. Over the years, the Government, in its effort to promote E&P activities to help in bridging the increasing supplydemand gap in oil & gas, has been offering exploration tracts onshore and offshore to companies on an international competitive bidding basis as per the New Exploration Licensing Policy (NELP).Besides participation in Indian basins, there are opportunities in several international provinces to participate in exploration & if successful production of hydrocarbons.

Selan Exploration Technology Limited Investment View: Buy BSE Code: 530075 NSE Code: SELAN Reuters Code: SELA.BO CMP: Rs.263.25 Target Price: Rs: 327.77 52 Week High: Rs.329.90 52 Week Low: Rs.124.00 Market Cap: Rs. 379.5 Cr P/E: 13.63 Market Lot: 1 Face Value: 10 Selan Exploration Technology Limited We initiate the coverage on Selan Exploration, with a buy recommendation as the company is at a stage to takeoff with new well developments in the existing oilfields and development of new oilfields also nearing completion, where production is about to commence. Even with oil prices stabilizing at lower levels, we expect the company to exhibit enhanced performance with increased production and reasonable margins. Operational Oilfields warrant certainty of production After opening the oil sector by Government of India in 1992 for private initiative in exploration and production of Hydrocarbons, SELAN was amongst the first private sector companies to have obtained rights to develop three discovered oilfields situated in the state of Gujarat namely Bakrol, Indrora and Lohar, all with proven oil and gas reserves. SELAN was subsequently awarded two more fields in Gujarat namely Ognaj Oilfield and Karjisan Gas field. Mining lease has also been executed for Ongaj Oil field with Government of Gujarat and the mine is about to commence development and production activities. Low marketing risk but performance impacted by oil prices With assured offtake of the entire oil and gas production from these blocks by the Government, as per the terms of the Production Sharing Contract there is zero marketing risk associated with this project. However, the pricing is linked to the prevailing oil prices & therefore sales and margins are also affected by international oil prices. Outperformance in financial results The company has shown impressive performance in Q1 09 during which, revenue raised up to Rs 35.8 Crores from Rs 10.1 Crores of the Q4 08 on the back of higher production from new wells and high crude prices. EBITDA margin also increased to 92%. Net profit was Rs. 17.8 Crores was grown by 479% on Q0Q basis in this quarter. Secured Growth plans The company has relatively low financial gearing and hence there is scope for syndicating debt to fuel its growth plans in future.

Company Overview Selan Exploration Technology Limited (SELAN) is a private sector listed company, incorporated in 1985, engaged in oil exploration and production since 1992. In year 1992 Government of India opened the oil sector for private initiative in exploration and production of Hydrocarbons, SELAN was amongst the first private sector companies to have obtained rights to develop three discovered oilfields situated in the state of Gujarat namely Bakrol, Indrora and Lohar, all with proven oil and gas reserves. SELAN was subsequently awarded two more fields in Gujarat namely Ognaj Oilfield and Karjisan Gas field. The various seismic and reserves assessment studies have established substantial amounts of oil and gas reserves in these blocks, which require developmental work and for the purposes it would require substantial amounts of Capital investment to augment its development and growth objectives. SELAN also has taken significant steps in terms of further development of Bakrol, Indrora and Lohar oilfields where seven new wells have been drilled in the drilling campaign which commenced in the last quarter of F.Y. 2007-08. The production testing of these wells has been encouraging and they have yielded good production levels. The Company has been analyzing the well logging data from the newly drilled wells to further identify 8-10 prospective drilling locations which would be taken up for drilling in the fiscal year 2008-09. All the oil and gas blocks have a well laid out infrastructure. Hence these blocks are easily accessible and are in close proximity to the Government's crude gathering station as well as are in close proximity to a large industrial town Operational Review The confirmed and feasible Reserves of Bakrol Oilfield have been upgraded from the previous 43.22 mmbbls to 73.30 mmbbls after the completion of the current drilling campaign in Bakrol Oilfield. Escalation in production The Company has been taking steps to develop its oil and gas fields so that production from the fields can be enhanced. Further prospective drilling locations are also being identified on an ongoing basis for developing the oilfields and enhancing crude oil production.

Crude oil production increased by 132% during the Q1 09 as it was 72,000 barrel in this quarter in the comparison of Q4 08 (31,000 barrel). Company expects to achieve volumes of 500,000 700,000 barrels per year within the next 2-3 years. Year 2004 2005 2006 2007 2008 Crude Oil Production (barrels) 62699 70206 73875 100963 120226 Crude oil production SELAN has rights over these 5 discovered oil fields given by MoPNG located within 40Kms radius from Ahmedabad. Company currently functions in 3 oil fields at Barkol, Indrora & Lohar. The company has warrant for 25 years and the lease for the above fields started 10 years back. The company has a lease period left of 15 years. The average producing life of a well is about 15-20 years. In 2004, company was given 2 more fields: Ognaj & Karsijan where the commercial production is yet to be start. Company have plan to drill 8-10 new wells and do some seismic work at a capex of 50-70 crores in each of the next 3 years. Funding shall be through a combination of debt, internal accruals and promoter funding. Location Indrora Lohar Barkol Covered Area (Sq KM) 130 5 36 Operating Wells 4-5 2-3 7 Production 100bpd 80-100bpd 700bpd 2P Reserves (mn Barrels) Under assessment Under assessment 73.3 Status Producing Producing Producing

Barkol This oil field is account for almost 90% of production for the company. The proven and probable reserves are revised up to 73.3 mn barrels from 43.22 mn barrels in the oil field. This oil field is covering the area of 36 Sq KM. Indrora Indrora, the biggest oil field owned by the company, covering area around 130 Sq Km (More the 3.5 times of Barkol Oilfield). Company management is confident about the oil reserve in this field, but the oil is trapped in shale/loose sands. Company is planning to dilute the participatory share of the oilfield and will use different technology in order to sustain higher production rate. Karsijan This field was awarded to the company in 2004. The commercial production is yet to start in the field. This is the only gas producing field of the company, for which the company has taken all the mining and regulatory approvals. Drilling and Commercial Production in Karjisan shall commence during this year. Lohar Lahar oilfield is covering the 5 Sq KM area, currently 2-3 wells are operating in the field. The total production from this small oilfield is around 100bpd. Total reserves are under assessment in this field. Ognaj Company has received the mining lease for this oil field on 5th-August-2008. The physical handover of the field is yet to be done. Commercial production from this oil field is expected in FY 2009-10. This oil field is covering around 13.9 Sq KM area. SELAN has a Development Plan for drilling of additional wells in these blocks in the next 3 to 5 years. The Plan is intended to be executed in a phased manner and would involve large capital expenditures, to be funded through a combination of external borrowings and internal accruals. The proposed external borrowings shall be drawn in various stages of completion of each phase. Environment Clearance Companies need to obtain Environment Clearance (EC) from Ministry of Environment and Forests (MoEF) in order to start new drilling activities according to revised guidelines from MoEF. The Company has already obtained the EC s for Bakrol, Indrora, Lohar and Ognaj in 2007-08. The EC for Karjisan has also subsequently been approved by MoEF in the Expert Advisory Committee (EAC) meeting held on 10 June 2008 and issued to the Company.

Production Sharing Contract Production Sharing Contract (PSC) is signed between the Government of India (GOI) and SELAN for a period of 25 years for the exploration and production of crude oil. Price of crude oil is based on international market rates; however, payment is receivable in Indian Rupees at the prevailing US Dollar / Rupee conversion rate. Historically, the company has been receiving a price at 5-7% discount to Brent. EBITDA Margins vs International Crude oil Prices Company s earnings before interest tax depreciation and amortization is heavily depend on crude oil prices prevailing in international market. As In the terms of Production Sharing Contract (PSC) with Government of India, selling price of crude oil per barrel is to be determined FOB delivery point at the prevailing international market rates in US Dollars. However, payment is receivable in Indian Rupees at the prevailing US Dollar / Rupee conversion rate. Thus the southward crude oil prices in the international prices may affect the EBITDA margins of the company in current quarter. EBITDA vs. Crude Oil

Historical Crude Oil Prices Crude oil prices touched its peak in the 1st quarter of FY 08-09 more than US$ 140/ barrel. EBITDA margins in this quarter was at 90.7% which was at 65.8% in ths same quarter of last year while crude oil prices was moving around US$ 65-70 / barrel. As the international crude oil prices are now moving downwards it may affect the EBITDA margins of the company in the quarter. Risks and Concerns Revenues of the company is depends upon the international crude oil prices and exchange rates, hence sudden drop in crude oil prices and US$ exchange rate may affect the company s revenues. Companies working in Exploration & Production segment require various environment clearances in order to drill the wells in the oilfields; it may take the time so the plane of expansions of the company may be delay. Dry wells (wells having insufficient oil), could result into low rate of production. Availability of rigs and crews at reasonable rates could emerge as significant bottleneck and also impact the capital costs.

Investment Rationale Significant Oil & Gas Reserves The Proven and Probable Reserves of Bakrol Oilfield have been upgraded from the previous 43.22 mmbbls to 73.30 mmbbls after the completion of the current drilling campaign in Bakrol Oilfield. Further the company s biggest oilfield Indrora (3.5 times the size of Barkol field) is under assessment and is expected to have significant reserves. The plan is intended to be executed in a phased manner and would involve large capital expenditures, to be funded through a combination of external borrowings and internal accruals. We expect the company to ramp up production from 120,000 barrels in FY08 to 400,000 barrels in FY10. The company should be able to increase the annual production to 1 million barrels in 3-4 years. Low Production Cost The company s Oilfields are discovered oilfields thus there are no exploration risks. The company incurs the seismic survey costs, drilling costs and the matter of concern is not whether there is oil but how much of it is there. Accordingly, the production costs are low and stand at USD 15 per barrel (including $4 royalty/cess paid to ONGC). Further, the company s capex costs for drilling a well is also comparatively lower and thus have a short payback period making drilling attractive. Low Debt Company Selan has a Debt/Equity ratio of 0.15 thus it will not be affected by high interest costs. Further, the company can take on leverage to fund and support its growth at competitive rates.

Valuation: DCF valuation F/Y 2009E F/Y 2010E F/Y 2011E F/Y 2012E Terminal Value Free Cash Flow (40.7) 7.3 13.3 35.5 902.2 Discounted Cash Flow (35.7) 5.6 8.9 20.9 465.7 Total DCF 465.5 Net debt 7.0 Shareholders Value 472.5 No. of shares 1.4 Price per share 327.77 Terminal Growth 5.0% Debt 16.6 Equity 54.7 71.3 WACC 14.1% Cost of debt 8.0% Risk free return 10.0% Beta 1.2 Expected return 15.0% Cost of equity 16% Shareholding Pattern Quarter Ending 31-Dec-07 30-Sep-07 31-Mar-08 30-Jun-08 Promoters Holding (Indian) 13.98% 13.71% 14.16% 14.23% Promoters Foreign (Foreign) 25.54% 25.54% 25.89% 25.83% Public Holding Institutions 2.76% 3.89% 3.12% 2.14% Public Holding Non - Institutions 57.71% 56.86% 56.83% 57.80% Total 14,416,070 14,416,070 14,416,070 14,416,070

Financials Quarterly Income Statement 4Q F/Y 1Q F/Y 2Q F/Y 3Q F/Y 4Q F/Y 1Q F/Y 2008 2009 2009 2009 2009 2010 Revenue 10.1 35.8 37.6 33.6 30.3 30.0 Growth (Q/Q) 30.0% 254.5% 5.0% -10.5% -9.9% -0.8% Direct expenses (1.4) (2.9) (4.2) (5.4) (7.9) (9.3) Gross Profit 8.7 32.9 33.4 28.2 22.4 20.7 Gross Margin 86.2% 92.0% 89.0% 84.0% 74.0% 69.0% Employee Cost (1.2) (0.5) (0.6) (0.7) (1.0) (0.8) Operating Expenses (SG&A) - - (7.1) (6.4) (5.8) (5.7) Operating expense as % of sale 0.0% 0.0% 19.0% 19.0% 19.0% 19.0% EBITDA 7.5 32.5 25.7 21.2 15.7 14.2 EBITDA Margin 74.5% 90.7% 68.4% 62.9% 51.7% 47.3% Depreciation (2.1) (2.3) (2.5) (2.8) (3.0) (3.3) Operating Profit 5.5 30.2 23.2 18.4 12.6 10.9 Operating Margin 54.2% 84.3% 61.7% 54.7% 41.6% 36.2% Interest (0.5) (0.6) (0.6) (0.6) (0.6) (0.6) Other Income/(expenditure) 0.5 0.4 0.3 0.3 0.3 0.3 Profit Before Tax 5.5 29.9 22.9 18.1 12.3 10.6 Provision for tax (2.8) (12.1) (7.5) (6.0) (4.1) (3.5) Tax Rate 50.8% 40.4% 33% 33% 33% 33% Net Profit- continuing operation 2.7 17.8 15.3 12.1 8.2 7.1 Growth Y/Y -20% 479% 349% 210% 205% -60% Net Profit 2.7 17.8 15.3 12.1 8.2 7.1 No. of equity shares 1.4 1.4 1.4 1.4 1.4 1.4 EPS- continuing operations 1.87 12.36 10.63 8.40 5.72 4.91 Growth Y/Y -20% 479% 349% 210% 205% -60% No. of shares- basic 1.4 1.4 1.4 1.4 1.4 1.4 EPS- basic 1.87 12.36 10.63 8.40 5.72 4.91 Growth Y/Y -20% 478% 350% 210% 206% -60% No. of shares- diluted 1.4 1.5 1.5 1.5 1.5 1.5 EPS- diluted 1.87 12.19 10.48 8.29 5.64 4.84 Growth Y/Y -20% 470% 344% 206% 202% -60%

Annual Income Statement 2007 2008 2009E 2010E 2011E 2012E Revenue 26.2 34.5 137.3 141.1 194.9 227.0 Growth (Y/Y) 39.8% 31.8% 298% 3% 38% 16% Direct expenses (5.4) (7.1) (20.3) (31.0) (42.9) (49.9) Gross Profit 20.7 27.3 117.0 110.1 152.0 177.1 Gross Margin 79.3% 79.3% 85.2% 78.0% 78.0% 78.0% Employee Cost (0.8) (1.9) (2.8) (3.3) (3.8) (4.3) Operating Expenses (SG&A) - - (19.3) (25.4) (35.1) (40.9) Operating expense as % of sale 0.0% 0.0% 14.0% 18.0% 18.0% 18.0% EBITDA 19.9 25.4 95.0 81.4 113.2 132.0 EBITDA Margin 76.2% 73.8% 69.1% 57.7% 58.1% 58.1% Depreciation (4.5) (5.3) (10.6) (15.0) (20.0) (25.0) Operating Profit 15.4 20.1 84.4 66.5 93.2 107.0 Operating Margin 58.9% 58.4% 61.4% 47.1% 47.8% 47.1% Interest (0.9) (1.6) (2.6) (7.3) (6.9) (5.9) Other Income/(expenditure) 1.4 1.2 1.4 1.4 1.4 1.4 Profit Before Tax 15.9 19.7 83.2 60.53 87.77 102.47 Provision for tax (5.4) (6.8) (29.7) (20.2) (29.3) (34.2) Tax Rate 33.7% 34.5% 35.7% 33.4% 33.4% 33.4% Net Profit- continuing operation 10.6 12.9 53.5 40.33 58.49 68.29 Growth Y/Y 23% 22% 314% -25% 45% 17% Net Profit 10.6 12.9 53.5 40.33 58.49 68.29 No. of equity shares 1.4 1.4 1.4 1.4 1.4 1.4 EPS- continuing operations 7.33 8.96 37.12 27.98 40.57 47.37 Growth Y/Y 22.8% 22.1% 314% -25% 45% 17% No. of shares- basic 1.4 1.4 1.4 1.4 1.4 1.4 EPS- basic 7.33 8.96 37.11 27.98 40.57 47.36 Growth Y/Y 19.7% 22.1% 314% -25% 45% 17% No. of shares- diluted 1.4 1.4 1.5 1.5 1.5 1.5 EPS- diluted 7.33 8.96 36.60 27.59 40.01 46.71 Growth Y/Y 19.7% 22.1% 309% -25% 45% 17% Key Ratios F/Y 2007 F/Y 2008 F/Y 2009 F/Y 2010 F/Y 2011 F/Y 2012 NOPLAT 10.21 13.20 54.30 44.31 62.16 71.33 Capital Employed 52.74 63.95 166.76 205.70 256.36 293.70 ROIC 21.7% 22.6% 47.1% 23.8% 26.9% 25.9% WACC 11.6% 14.1% 13.4% 13.9% 14.5% 15.5% ROIC-WACC spread 10.1% 8.5% 33.6% 9.9% 12.4% 10.4%

Balance Sheet 2007 2008 2009E 2010E 2011E 2012E Cash & equivalents 10.3 23.6 23.6 23.6 23.6 23.6 Receivables 7.6 11.5 45.1 46.4 64.1 74.6 Inventory 1.4 1.8 5.0 7.7 10.6 12.3 Other current assets 6.7 7.5 7.5 7.5 7.5 7.5 Total current assets 26.0 44.4 81.3 85.2 105.8 118.1 Gross Block 12.7 14.0 71.4 121.4 171.4 221.4 Accumulated Depreciation (8.4) (9.1) (19.7) (34.7) (54.6) (79.6) Capital WIP 2.8 7.4 - - - - Net Block 7.1 12.3 51.7 86.7 116.8 141.8 Other assets 43.1 53.1 53.1 53.1 53.1 53.1 Total assets 76.2 109.7 186.1 225.0 275.7 313.0 Short term debt - - (8.1) 1.6 4.9 (14.9) Creditors 2.4 - - - - - Other current liabilities 3.4 19.1 - - - - Total current liabilities 5.8 19.1 (8.1) 1.6 4.9 (14.9) Term Loan and debentures 11.1 16.6 66.6 55.5 44.4 33.3 Deferred tax liability 14.9 19.3 19.3 19.3 19.3 19.3 Reserves and Surplus 30.0 40.3 93.8 134.2 192.7 260.9 Equity Share Capital 14.4 14.4 14.4 14.4 14.4 14.4 Total liabilities 76.2 109.7 186.1 225.0 275.7 313.0 Cash Flow 2007 2008 2009E 2010E 2011E 2012E EBITDA 20.5 25.7 95.0 81.4 113.2 132.0 Tax paid (2.0) (0.5) (29.7) (20.2) (29.3) (34.2) Change in W/c (0.6) 3.5 (56.0) (3.9) (20.6) (12.3) Change in receivables 1.5 (4.1) (33.7) (1.2) (17.7) (10.6) Change in inventory (0.1) (0.4) (3.2) (2.6) (2.9) (1.7) Change in other current assets - - - - - - Change in creditors (2.0) 8.0 - - - - Change in other current liab. - - (19.1) - - - Operating cash flow 18.0 28.7 9.3 57.3 63.3 85.5 Capital expenditure (24.2) (20.5) (50.0) (50.0) (50.0) (50.0) Free Cash Flow (6.2) 8.2 (40.7) 7.3 13.3 35.5 Interest paid (0.9) (1.7) (2.6) (7.3) (6.9) (5.9) Payment of dividend - - - - - - Other 0.8 1.3 1.4 1.4 1.4 1.4 Cash Surplus/(deficit) (6.3) 7.8 (41.9) 1.4 7.8 30.9 Financed/used by/in: Availment/repayment of debt 3.0 5.5 41.9 (1.4) (7.8) (30.9) Change in Short term debt - - (8.1) 9.7 3.3 (19.8) Change in Long term debt 3.0 5.5 50.0 (11.1) (11.1) (11.1) Net Change in Cash (3.2) 13.3 - (0.0) - - Opening Cash Balance 13.6 10.3 23.6 23.6 23.6 23.6 Closing cash & equivalents 10.3 23.6 23.6 23.6 23.6 23.6

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Hindustan Oil & Exploration Company Limited Investment View: Sell BSE Code: 500186 NSE Code: HINDOILEXP Reuters Code: HOEX.BO CMP: Rs.114.30 Target Price: Rs. 104 52 Week High: Rs.176.90 52 Week Low: Rs.98.00 Market Cap: Rs. 1491 Cr P/E: 57.44 Market Lot: 1 Face Value: 10 HOEC Limited HOEC operates in the Oil & Gas Exploration and Production (E&P) Industry, with its current portfolio of assets located in India. The E&P are under a Production Sharing regime, wherein the Company enters into a Production Sharing Contract with the Indian Government for exploration and development of hydrocarbon resources. The Company initiated eight Oil & Gas Blocks under its management in the state of Gujarat, Tamilnadu and Assam. Due to non commerciality of a block in Camby Basin, it was surrender to Government. Therefore, now the Company holds 7 blocks under its name. The PY-3 Block in Cauvery Basin contributes maximum towards company total revenue. CB-ON/7 and North Balol Field in Gujarat are also operating in a healthy condition, but the Asjol Block in same location is on a downward trend with a reducing production capacity of 46btupd. The same is being considered for reassessment. A commercial discovery of Gas has been made in PY-1 Block & is soon expected to be profitably operational. The other two blocks CB-OS/1 and AAP-ON-94/1, are in different phases of Production & Development and the commercial viability of these projects is not assured at this point of time. The Company also has a marketing tie-up with the U.K. based Bardhal, under the name HOEC Bhardal India Ltd, which markets Bardhal s high performance engine additive products in India. Eni, a U.K. based company has recently acquired additional 20% stake in HOEC, resulting in total of 47.17% stake of Eni in HOEC. This led to reduction in HOEC public shareholding from 72.83% to 52.82%. We believe that at current valuation factors in extreme optimism from the company s performance which we have observed are against the previous business experience of company operations.

The Company HOEC operates in the Oil & Gas Exploration and Production (E&P) Industry, with its current portfolio of assets located in India. The E&P industry in India operates under a Production Sharing regime, wherein the Company enters into a Production Sharing Contract with the Government of India for exploration and development of hydrocarbon resources. Typically, players form an unincorporated joint venture consortium to address specific opportunity with flexibility to farm-out or farm down its participating interest subject to customary government approvals. This structure allows the E&P players to, not only diversify risk, but also helps bringing in collaborative and varied expertise. Over the years, the Government, in its endeavor to promote E&P activities to help in bridging the increasing supply-demand gap in oil and gas, has been offering exploration tracts onshore and offshore to companies on an international competitive bidding basis as per the New Exploration Licensing Policy (NELP). Operations Overview The Company s activities relate to exploration and production (based on exploration success) of hydrocarbons - crude oil and gas, which are natural resources. The Company s aggregate production during the FY 2006-07 was 503,408 barrels of oil equivalent (boe) (crude oil: 494,622 bbls; gas: 1,548,788 scm) as against 460,172 boe during the previous year. Field located in Cauvery Basin continues to be the predominant source of the Company s production. Name of the Block HOEC Interest Remarks AAP-ON-94/1 (Assam-Arakan Basin) CY-OS-90/1 (PY-3 Field) (Tamilnadu - Cauvery Basin) Exploration 40.32% Dev. & Prod. 26.88% Exploration 21.00% Dev. & Prod. 21.00% After abandoning the wells initially, new seismic data was collected in 2003 pursuant to which initial exploration has confirmed presence of gas reserves. It is planned to for further exploration & appraisal. Being the largest oil producing block of the company, it contributes 80-90% crude production of the company. All the crude oil from this field is sold to Chennai

PY 1 (Tamilnadu - Cauvery Basin) Asjol (Mehsana, Gujarat Camby Basin) North Balol Field (Mehsana, Gujarat Camby Basin) CB OS/1 (Gujarat Camby Basin) Block CB-ON-7 (Palej) (Bharuch, Gujarat Camby Basin) Exploration 100% Dev. & Prod. 100% Exploration 50.00% Dev. & Prod. 50.00% Exploration 25.00% Dev. & Prod. 25.00% Exploration 57.11% Dev. & Prod. 38.07% Exploration 50.00% Dev. & Prod. 35.00% Petroleum Corporation Limited (CPCL), the Government s nominee, at a price linked to Brent. The block contains basement gas field & the Company s revised plan of development (RPoD) envisages development of these gas reserves by drilling 3 extended wells. The project is expected to be completed in the year 2009. The company has entered into natural gas sale and purchase agreement with a power company for 51,000 btupd. 3 Wells are on production since 1995, however the production levels have dropped significantly and the company is in the process of reassessment. Currently with 3 wells on production, the Company has executed a Gas Sharing Agreement (GSA) with GSPC. Additional Development has also been planned for implementation. Commercial Discovery has been declared & currently Operator is preparing Plan of Development for approval. ONGC [licensee] has backed in for their 30% share in the development phase. Evaluation of Harinagar area, of about 846 sq. km. for commerciality is under progress. After the completion of exploration phase, 2 oil fields have been discovered, is under production & development phase.

Block CY-OSN-97/1 In the past, the Company with consortium had drilled two exploration wells in Block CY-OSN-97/1, as per commitment under the Production Sharing Contract (PSC), which had been plugged and abandoned. At the end of exploration period, as per the terms of the PSC, the Block CY-OSN-97/1 stands relinquished. The Company had 80 % participating interest in this Block. Subsidiary HOEC Bardahl India Limited (HBIL) HOEC and Bardahl Manufacturing Corporation Inc., USA, (Bardahl) are engaged in the formulation, manufacturing and marketing of Bardahl range of high performance engine additives. The companies have agreed to undertake the new project through HOEC Bardahl India Limited (formerly Hindage Oilfield Services Limited) a wholly owned subsidiary of HOEC. On account of focused marketing strategy, HBIL has been able to increase its presence in the automotive segment through strategic alliance with OEMs like Maruti and Hyundai. Further, HBIL is targeting industrial segment, more specifically power generation. Eni UK Holding stake in HOEC (Aug 08) Eni UK Holding Plc, acquired over 2.61 crore shares in HOEC, representing 20 per cent stake in the company through an open offer at Rs 144.2 per share, taking the total size of the offer to over Rs 376 crore. Accordingly, the public shareholding in HOEC has decreased to 52.82 per cent from the earlier 72.83 per cent. In April, Eni had offered to buy an additional 20 per cent stake in HOEC. The open offer for 20 per cent stake came after Eni SPA, the parent company of Eni Holding, bought UK crude producer Burren Energy Plc, which owned 27.17 per cent in HOEC. The transaction led to an indirect purchase of 27.17 per cent stake in HOEC.

RISKS AND UNCERTAINTIES The principal risks and uncertainties facing the Company, and the action taken to mitigate these risks, are as follows: Oil Price Volatility HOEC is exposed to volatility in the oil price since the company does not have any oil price hedge. The impact of a falling oil price is however partly mitigated via the production sharing formula in the PSCs, whereby our share of gross production increases in a falling oil price environment due to cost recovery mechanism. Cost Inflation impacting both Goods and Services Under the terms of the PSCs, operating expenditure and capital costs are recoverable through cost recovery mechanism, and so the effect of cost increase is cushioned to certain degree, subject always to approval of expenditure by the Management Committees under the PSCs. Geological Risk Exploration is inherently a risky business, with statistically only a relatively small proportion of exploration wells resulting in commercial discovery. It is not possible to insure against the risk of failure. Shareholding Pattern Quarter Ending 31-Dec-07 30-Sep-07 31-Mar-08 30-Jun-08 Promoter Shareholding - Foreign 27.17% 27.17% 27.16% 27.16% Public Shareholding - Institutional 14.20% 15.58% 18.24% 15.74% Public Shareholding - Non Inst 58.63% 57.25% 54.59% 57.09% Total number of Shares 130493289 130493289 78312668 78312668

Financials Income Statement 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Income 51.0 45.0 90.0 103.2 122.2 96.8 Growth (Y/Y) -11.7% 100.1% 14.7% 18.4% -20.8% Direct expenses (18.8) (16.7) (18.2) (19.1) (20.6) (35.9) Gross Profit 32.2 28.3 71.9 84.1 101.6 60.9 Gross Margin 63.1% 62.8% 79.8% 81.5% 83.1% 62.9% Employee Cost (2.4) (3.3) (5.0) (7.2) (6.1) (7.8) Operating Expenses (SG&A) (1.0) (1.4) (2.0) (10.2) (11.3) (2.4) Operating expense as % of sale 1.9% 3.1% 2.3% 9.9% 9.2% 2.4% EBITDA 28.8 23.6 64.8 66.7 84.3 50.7 EBITDA Margin 56.4% 52.4% 72.0% 64.6% 68.9% 52.4% Depreciation (14.4) (4.6) (8.8) (7.8) (7.7) (5.3) Operating Profit 14.3 19.0 56.0 58.9 76.6 45.4 Operating Margin 28.1% 42.2% 62.2% 57.0% 62.6% 46.9% Interest (0.0) (0.0) (1.6) (1.8) (4.9) (7.6) Other Income/(expenditure) 7.7 4.5 6.2 12.8 22.8 20.5 Profit Before Tax 22.1 23.5 60.6 69.9 94.5 58.3 Provision for tax 6.4 0.8 (22.9) (9.3) 1.2 (15.8) Tax Rate -29.1% -3.3% 37.8% 13.3% -1.2% 27.1% Net Profit- continuing operation 28.5 24.3 37.7 60.6 95.7 42.5 Growth Y/Y -15% 55% 61% 58% -56% Provisions & Write offs (17.0) (2.2) 1.1 (41.9) (93.1) (16.7) Net Profit 11.5 22.1 38.7 18.7 2.6 25.8 No. of equity shares 5.9 5.9 5.9 5.9 7.8 13.0 EPS- continuing operations 4.85 4.13 6.41 10.31 12.22 3.25 Growth Y/Y -14.8% 55.1% 60.8% 18.4% -73.4% No. of shares- Basic & Diluted 5.9 5.9 5.9 5.9 7.1 9.8 EPS- Basic & Diluted 1.96 3.76 6.59 3.19 0.37 2.64 Growth Y/Y 91.9% 75.3% -51.6% -88.4% 613.4%

Balance Sheet 2002-03 2003-04 2004-05 2005-06 2006-07 Cash & equivalents 31.7 72.4 93.3 74.5 111.2 Receivables 4.0 0.6 11.1 9.1 20.5 Inventory 3.6 6.5 8.8 19.3 25.8 Other current assets 104.5 54.0 69.8 56.9 33.9 Total current assets 143.8 133.5 182.9 159.8 191.3 Gross Block 135.7 165.2 234.1 293.1 434.6 Accumulated Depreciation (81.4) (84.9) (98.3) (107.6) (116.9) Net Block 54.2 80.3 135.9 185.5 317.7 Investments 3.6 18.4 4.9 0.1 70.4 Deferred tax asset 10.0 12.4 9.2 17.7 48.8 Total assets 211.6 244.6 332.9 363.0 628.3 Creditors 8.7 21.6 28.4 22.5 73.0 Other current liabilities - - - 0.8 - Total current liabilities 8.7 21.6 28.4 23.3 73.0 Term Loan and debentures - - 27.5 16.3 132.1 Other Liability 19.8 24.4 46.6 80.9 31.6 Reserves and Surplus 124.3 139.8 171.8 183.8 313.2 Equity Share Capital 58.8 58.8 58.8 58.8 78.3 Total liabilities 211.6 244.6 332.9 363.0 628.3 Cash Flow 2002-03 2003-04 2004-05 2005-06 2006-07 EBITDA 27.8 20.6 63.7 74.7 94.5 Tax paid (2.9) 2.8 (19.6) (15.9) (28.2) Change in W/c (22.3) 84.1 (13.9) (8.5) 17.1 Operating cash flow 2.6 107.5 30.1 50.3 83.4 Capital expenditure 4.5 (83.3) (51.6) (67.4) (233.0) Free Cash Flow 7.1 24.2 (21.5) (17.2) (149.6) Interest paid (0.0) (0.0) (0.0) (1.8) (14.7) Payment of dividend (6.9) (5.2) (6.5) (6.6) (6.9) Other 3.5 21.7 21.4 18.0 (58.0) Cash Surplus/(deficit) 3.7 40.7 (6.6) (7.6) (229.2) Financed/used by/in: Availment/repayment of debt (0.0) - 27.5 (11.2) 117.1 Issue/redemption of capital - - - - 148.8 Net Change in Cash 3.6 40.7 20.9 (18.8) 36.7 Opening Cash Balance 28.0 31.7 72.4 93.3 74.5 Closing cash & equivalents 31.7 72.4 93.3 74.5 111.2

Price Volume Chart Investment Rationale The company s turnover/sales solely depend upon natural resources & forces. Tuning with the company s objective to grow, it is carrying out various expansion activities focused on development of new wells/projects, at most of its assigned blocks. Since the development is in various stages of completion, it is expected that it will take time to setup & stabilize and the projects will be commercially profitable after a short mid term (3-5 Yrs). The geological risk attached with the operations of the company is applicable to these project also and there is a strong probability that if these new projects does not results in discovery of substantial oil and/or gas resources, the company, as it has done in past, will have to put a blade on its income to write-off these expenses incurred in the development program. Further, as per the terms of Production Sharing Contract (PSC), the Government holds the right to increase its exploration/development share in the assigned blocks, which hampers the profitability of the company. The situation gets worsened by factors like water entering the well or other natural calamities & results in lowering the production of the blocks. Therefore, in light of these factors of uncertainty, along with the fluctuating financials, which depicts an irregular business cycle, we take a Sell view on this stock.

601-602, Sukh Sagar, N.S. Patkar Marg, Girgaum, Chowpatty, Mumbai - 400 007 Research Analyst Govind Saboo Email: govind.saboo@gmail.com Contact: +91 94140 72008 Research Associates Vikas Chechani, Amit Bakliwal Disclaimer: This document has been prepared by the Research Division of IndiaNivesh. Ltd. Mumbai, India and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of IndiaNivesh. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, IndiaNivesh has not independently verified the accuracy or completeness of the same. Neither IndiaNivesh nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances.