If you are not familiar with nitty gritty of upstream producers here is a quick refresher. When companies decide to invest in drilling activities it’s based on very rigorous probabilistic modeling of a whole range of factors including production growth needed, oil prices, supply chain etc that are then forecast over 5 years. So when, in most of the cases, companies decide to drill the wells they don’t change that plan based on 5-15% shallow fluctuations in oil prices because they are already factored into their business plan.

What could change that are extreme events (e.g. covid) or shale boom that can lead to 50-100% cuts in oil prices or major wars (e.g. Ukraine-Russia) that saw oil prices crossing 120.

So in my view as long as oil stays with 65-85 price range, it will be business as usual. It’s not that a drilling contractor working on a term contract will charge more to their customers if oil prices move up by 5-10% tomorrow or vice-versa. They get paid what their contract says. The only risk is unpredictability of execution which is what gets impacted if there are deep fluctuations in oil prices.

What one has to look at is risk-reward in their investment. Markets discount all positives and negatives very quickly and often before normal investors like us. So if a stock has run up 8-10 x already one needs to evaluate how much of all future positives are already factored in and what are the possibilities of any negative surprises.

My inputs on SG Mart’s quarterly result and concall : SG Mart Q2 Results

My 2 cents, with lots of salt:

The problem with (So called) investors, so impatient, they build a lot of things in their analysis models, even a slight disappointment is looked with microscope. But hardly businesses run in that way.

If this is a Start up or Tech company or E-commerce company, with the sales growth, volumes they achieved in last 5 quarters, no margins questions would have asked.

Lots of Billion dollar sales businesses still burning lots of CASH.
Yet they are profitable at both EBIDTA and PAT. Such is the Business they started with decadal experience from APL, in Steel manufacturing.

Not every thing to be looked into microscopic view.

It takes years, if not decades, to build “PROFITABLE” businesses.

So to summarise, following are the risks:

1. low steel price, means lower revenue
2. high fluctuations in steel price in short period like Q2FY25 where they are not able to clear inventory without discounting.

I think their FY25 perf will depend on steel price fluctuations moving forward.
Disclaimer: not invested, inclined to invest at much lower levels.

We share the view on the supply and demand dynamics which influence the price

However the premise of my query was the paradox of it,

Although I agree that drilling activities may be depends on other factors, however the incremental profitability of the drilling industry, is directly proportional to crude oil price, since the whole premise itself that the supply of drilling rigs are not gonna increase meaningfully, so unless the crude oil picks up meaningfully there wont be incremental profit growth that can happen , which in turn directly affects the share price growth.

While taking a granular view on jindal drilling here the setup of the thesis is based on the fact that the incremental profits may be influenced by following rigs and upcoming contracts

Although the data suggest that jackup demand to be stable, but if the crude oil price doesn’t increase , the new contracts may not be yield better profitability , which affects investment time horizon as well as expectation built on it (Allocation conviction).

The idea behind, my queries to get understanding of the people who has allocated more interm’s of the PF percentage, and how they are thinking about above mentioned scenarios.

Any view and clarification based on their research and thought process is very much appreciated.
Thanks @nirvana_laha

Disclaimer: Invested and biased. (looking to build more conviction to increase the allocation, since, its not long term play, at best its medium term, so for any meaningful return needs higher allocation)