Companies: HDY   

Hardy Oil and Gas, one of the star-performing resource groups on AIM for the past three years, is still riding high on offshore Indian and Nigerian prospects now that it has transferred its shares to the Full List. This year the company is poised to drill up to ten exploration wells, which, if successful, could transform the group and the value placed upon it by investors.

Co-founded and run by oil industry veterans Sastry Karra, chief executive, and Yogeshwar Sharma, chief operating officer, Isle of Man-registered Hardy holds ten per cent of Block D9, off the east coast of India, which is estimated to hold a possible 45 trillion cubic feet of gas. Hardy’s 90 per cent partner, India’s Reliance conglomerate, is the operator and plans to drill its first deep-water well there in the second quarter of this year.

Potentially as exciting is Block D3 in the same area, where Hardy has ten per cent and operator Reliance, with 90 per cent, began drilling a second exploration well last month. Elsewhere, the company is to drill three appraisal wells in Block CY-OS/2 in the Cauvery Basin south of Pondicherry, which is estimated to hold more than 230 million barrels of oil. Hardy is the operator and owns 75 per cent of the block, where one well was drilled last year.

On the other side of the sub-continent, the company has ten per cent of Block GS-01, west of Mumbai, which is estimated to hold a gross 54 billion cubic feet of gas. Here, again, Reliance is the operator and, having drilled one well last year, plans to drill three more in 2008.

With other interesting projects in India already, Hardy, which had £17 million cash at the end of September, is evaluating the blocks that are expected to become available in the Indian government’s next licensing round. The Delhi administration is keen to encourage the development of its resources industries and Karra, who is chairman of the Association of Oil and Gas Operators of India, says the tax and regulatory systems are benign.

Nigeria is another field of operation for Hardy. The company has 40 per cent of the Oza Block there, with a gross estimated contingent resource of 3.8 million barrels of oil (which is expected to start production early next year), and 20 per cent of the Atala Block, holding a gross estimated contingent resource of 7.5 million barrels of oil and 359 billion cubic feet of gas.

But it is India from which Hardy’s present production comes. The company has 18 per cent of Block PY3 in the Cauvery Basin, where it reckons it is entitled to proven and probable oil reserves of 2.69 million barrels, out of an estimated gross total of 17.57 million.

There were some technical problems in 2007 at PY3, where production from existing wells has been declining. Output fell from 5,913 barrels a day in 2006 to 4,163 barrels last year and has fallen further, although the company says it expects to maintain production of 3,200 barrels a day throughout 2008 and intends to drill two new wells early next year.

This decline helps to account for the fact that Hardy’s revenues in the nine months to September were just £6 million, less than half the full-year 2006 figure of £10.7 million.

Net profits for the first nine months of 2007 were £1.4 million, against £5.1 million for all of 2006.

But it is this year’s drilling prospects that are exciting the market. Hardy raised £21 million at 423p on AIM last June to fund developments and expects to tap London Stock Exchange investors for more later this year, but at 680p the shares are 472 per cent up on their 2005 AIM float price of 144p. With oil testing $100 a barrel, the market is likely to maintain its appetite for Hardy shares, if the drilling goes well. Speculative investors should buy some more.