A must-have proxy stock for an energy security watchlist

The impact of most of these macro events will even out in the long term, appearing as noise depending on your investing horizon.

However, there is one event that has once again brought to the forefront the question of India's energy security.

In recent years, themes like electrification and green energy have diluted concerns on this aspect.

Yet, the truth is we are still dependent on imports for 85% of energy requirements. And any supply disruption or sharp price rise is negative for India's growth story.

Bottomline - We need to be self-sufficient for our energy needs.

To be fair, policies have been amended to move in this direction.

A case in point is the shift from NELP (new exploration and licensing policy) to OALP (open acreage licensing policy) in 2016-17 for oil and natural gas exploration.

Among other differences, one was that under NELP, it was the government that used to put a hydrocarbon (oil and gas) block on tender.

However, under OALP, the explorer can select the exploration block independently. This is likely to bring more area under exploration and production. To encourage this, geoscientific data is made accessible to all players under the National Data repository.

If the block selected by a company is suitable for award, competitive bids are held under twice a year bidding system. Unlike NELP where government's income was from profit sharing that led to difference of opinion about costs, OALP goes for revenue sharing.

The new system also adjusts for risks and difficulty in exploring different kinds of blocks.

The ninth round of OALP concluded in September. The next round is expected early next year. In the tenth round, areas that were termed 'no-go' earlier will be offered, opening up more opportunities for exploration and production companies.

To be sure, the gestation period here can be long. The results are not certain.

Hence, instead of dwelling on oil and gas exploration and production companies, let us focus on the companies in the oil and gas exploration and production ecosystem.

That brings us to a specific smallcap - Deep Industries.

For over three decades, Deep Industries has been providing various oil and gas support services.

These include natural gas compression (to ensure flow of natural gas through pipeline) and dehydration (regulatory requirement for gas production and transportation to avoid blasts), workover and drilling rigs services, and integrated project management services.

Its offerings find applications from exploration and production to midstream services. Across most of these offerings, it is the pioneer, the only player, or the market leader.

Its latest industry segment is EPC (engineering, procurement and construction) of entire gas processing facilities on a charter hire basis.

With these offerings, Deep Industries covers over 70% of post exploration in the oil and gas service value chain. Its clients include almost all leading oil and gas players like ONGC, Cairn, Oil India, GSPC, Gail, Vedanta, Reliance, Essar, GSPL, and Selan Exploration.

Under offshore services markets, its target industry segments include communication, transmission, and transportation (undersea power and data cables), apart from oil and gas players.

The latest quarter has been the highest ever in terms of revenue and net profit.

The return ratios have been on an upward trajectory. The return on equity and capital employed (excluding intangibles) were 14.4% and 15.6% in the half-year ended September 2024, respectively. The debt-to-equity ratio is 0.16x.

The company recently awarded a production enhancement contract, leading to a 119% YoY orderbook growth.

Its order book, at over ₹2,600 crore, is over 5x its trailing 12-month revenue. The management has guided for over 35% growth for the next two years.

The stock is trading at a trailing 12-month price-to-earnings ratio of 22x.

This is not a stock recommendation. Any investment is subject to risk and needs due diligence.

That said, as India gets serious about energy security, this is a must-have stock for your watchlist.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com