Deep Industries To See Growth Driven By Gas Compression Business

Deep Industries Ltd. is a key player in the gas compression space. The company enjoys 80.2% market share in the outsourced gas compression market, which is likely to grow.

Whether one is a CNG vehicle user or an industry player using PNG powered generators, the process of gas compression plays an important role for natural gas to reach vehicles, homes or businesses.

When natural gas is extracted, the pressure of the gas is usually quite low and may not be as per the requirement intended for end-use application. Deep Industries' gas-compression service helps increase gas pressure by reducing the gas volume.

This increased pressure helps for more efficient gas transportation via pipelines and also maintains optimal pressure levels since friction within pipeline transportation can cause pressure drops.

Deep Industries specialises in providing oil and gas field-support services. The company's services portfolio includes natural gas compression, natural gas dehydration, workover and drilling rigs services and integrated project management services.

The natural-gas-compression segment accounts for 37% of Deep Industries' total revenues. The Ebitda margin within the segment also stands the highest at 60%, making it the most profitable segment for the company. Growth within the space will stand to benefit the company significantly.

The International Energy Agency expects India's natural gas demand to rise by 6% in 2024. It said factors like higher gas use in industries such as fertiliser production and stronger gas consumption in the power sector are set to drive the growth.

The Union government aims to increase the share of natural gas in the country's overall primary energy mix. The target is to reach 15% by 2030, which is a substantial jump from the current level of around 6%.

The market for gas compressors is likely to witness a compound annual growth rate of 3% from 2022 to 2027. The Asia-Pacific region is projected to be the primary driver of this market growth, according to Mordor Intelligence.

It also highlights India and China as significant contributors to the market, given their status as prominent consumers and players in the global oil and gas industry.

Deep Industries is a service provider and will only benefit if natural gas extractors outsource the services the company offers.

The company's management expects outsourcing work for compression of gas to increase from 30% currently. The scope to increase is set as clients are now looking out for more cost-effective and time-efficient solutions to allow them to focus on the core exploration and production operations, according to IDBI Capital.

Efficient execution by Deep Industries boosts the client's revenue monetisation cycle to six–eight months. If done in-house, the cycle will be around 12–18 months, it said.

As of the third quarter of the last financial year, the company's order book stood at Rs 1,200 crore, a 23% year-on-year increase. Out of that, Rs 500 crore or 41% of the order book is from the gas compression services and with average contracts in the range of three to five years. The current order book provides the company with near-term revenue visibility.

Deep Industries purchases natural gas compression sets and places them on charter hire with its clients, with average contracts of three to five years. The company's revenue is majorly dependent on three key clients.

Oil and Natural Gas Corp. contributed 60% to the company's total revenues, followed by Oil India Ltd. and Vedanta Ltd. at 18% and 15%, respectively. The revenue contribution of the top three companies is also set to rise further, with orders worth Rs 97 crore from ONGC and Vedanta in the December quarter.

With 93% of Deep Industries' revenues being concentrated with three clients, higher and positive expectations regarding gas production is set to help the company's performance:

The exploration and production company is anticipating a gas production of 15.2 billion cubic metres this year.

Currently, the KG-DWN-98/2 block is producing 1.75 million cubic metres of gas per day, but the company aims to increase this to 10 million standard cubic metres per day from the deepwater block.

ONGC is also expecting a significant rise in gas production from fiscal 2027 with the commissioning of the Daman project, which will add approximately 4 million cubic metres of gas production per day.

Consequently, the company is projecting a 14–15% increase in production by fiscal 2027, fuelled by gas from the KG 98/2 block and the Daman project.

The exploration company aims to achieve a gas production of 5 billion cubic metres within the next two years. The majority of the gas will be sourced from the Baghjan field in Assam. The company reports a significant rise in gas production from this field and is presently building a new gathering station at the site.

Oil India has also emphasised that the gas production in its Northeast gas network was hindered primarily due to the lack of connectivity with the rest of the country. The company's management has said that once the network is connected, it will be able to capitalise on the chance to sell gas beyond the current market.

Oil India said that the Indradhanush Gas Grid in the Northeast was almost ready, and the company only proposed one more line in IGGL. If that line is available, Oil India will be able to produce more gas.

Vedanta's presence in the gas exploration and production field comes via its subsidiary, Cairn India, which is one of the largest private sector oil and gas producers in India. The company is focusing on further exploration and development of existing gas fields to optimise production since it makes a bigger margin on gas.

The company's oil and gas operations account for nearly one-quarter of India's production and targets to contribute 50% to India’s total oil and gas production, according to Vedanta.