Ashish Chugh s HIDDEN GEMS. in search of Market Beating Stocks January 28, 2013 Selan Exploration Technology Ltd. CMP Rs. 311.35 BSE Code 530075 NSE Symbol - SELAN We believe the process of grant of approvals by DGH for drilling new wells has commenced and expect Selan to start getting approvals in a phased manner. With the company having completed 3D Seismic studies in all its oilfields, the next 3-4 years may just be devoted to production ramp up. Selan Exploration is an independent E&P company engaged in onshore exploration and production of crude oil and natural gas. The company owns five oil and natural gas fields with proven reserves. Currently, the company carries out its crude oil production activities in Bakrol, Indrora and Lohar oilfields in Gujarat. These oil fields were awarded to the company in 1995 under a Production Sharing Contract (PSC) with 100% participating interest by the Government of India. Further, the company signed an agreement for the Ognaj oilfield and the Karjisan gas field with the Ministry of Petroleum and Natural Gas (MoPNG). All the fields are located in Cambay basin in Gujarat. Cambay Basin is an oil rich region and has been categorized as Category I sedimentary basin meaning commercially productive region.
Financials The latest financials of the company are given as under :- QUARTERLY - LATEST RESULTS - Selan Explorations Technology Ltd (Curr: Rs in Cr.) As on 25-01-2013 Quarter Quarter Quarter YTD / Latest Half YTD / Latest Half YTD / Latest Half Year (Mar 12) (12) Year (Mar 11) (12) Year (Sep (Sep (Sep (% Particulars 12) (Sep 11) (% Var) 12) 11) Var) (%Var) Sales 24.05 19.96 20.5 51.09 44.39 15.1 92.73 70.95 30.7 Other Income 3.18 2.73 16.5 5.94 5.22 13.8 10.83 6.26 73 Other Operating Income PBIDT 19.08 14.21 34.3 38.76 34.68 11.8 69.52 50.23 38.4 Interest 0.34 0.6-43.3 0.71 1.23-42.3 4.2 2.56 64.1 PBDT 18.74 13.61 37.7 38.05 33.45 13.8 65.32 47.67 37 Depreciation 0.35 0.33 6.1 0.7 0.65 7.7 1.33 1.18 12.7 PBT 18.39 13.28 38.5 37.35 32.8 13.9 63.99 46.49 37.6 Tax 4.88 3.21 52 10 7.92 26.3 16.95 11.26 50.5 Deferred Tax 1.09 1.11-1.8 2.14 2.98-28.2 3.16 3.49-9.5 PAT 12.42 8.96 38.6 25.21 21.9 15.1 43.88 31.74 38.2 Rs. Cr. Latest Data Latest Equity(Subscribed) 16.99 Latest Reserve 190.57 Latest EPS -Unit Curr. 28.8 Latest Bookvalue -Unit Curr. 122.17 Face Value 10 Book Value (with YTD NP) - Unit Curr. 137 Stock Exchange BSE NSE Latest Market Price--Unit Curr. 311.35 311.4 Latest P/E Ratio 10.81 10.81 Latest P/BV 2.55 2.55 52 Week High -Unit Curr. 350 351 52 Week High-Date 27/09/2012 27/09/2012 All Time High -Unit Curr. 425.36 425.27 All Time High-Date 19/01/2010 19/01/2010 52 Week Low -Unit Curr. 255 248 52 Week Low-Date 19/03/2012 08/09/2012 All Time Low -Unit Curr. 2.27 56.91 All Time Low-Date 01/03/1999 28/02/2007 Market Capitalisation 528.98 529.07 Dividend Yield -% 0.96 0.96 (Source : Capitaline)
Investment Rationale There are few factors which make us bullish on the potential of Selan Exploration :- Low Operating Costs, High Margins, High Cash Flows, High Return Ratios The company has High Operating Margins of over 80% and has an Operating cost of just about $9-10 per barrel (plus royalty & cess of roughly $5 per barrel). The company generates significant Cash Flows and has extremely healthy Return on Capital Employed which has been in excess of 25% and Return on Net Worth, which have been in excess of 20% consistently. Business Model Relatively Derisked Unlike other Oil Exploration companies, Selan Exploration has invested in Exploratory blocks that have a track record of proven commercial production. This benefits the company in two ways one the company doesnot have to invest in the exploratory activities which could consume time and capital and two, it means that company is not exposed to the inherent risk associated with the exploration business. Significant Ramp up Expected in Future Selan s capacity expansion was curtailed on account of non receipt of approvals from DGH for drilling new wells even though the company had received Environmental Clearances. We believe the process of grant of approvals has commenced and we expect Selan to receive approvals from DGH in a phased manner. This will enable the company commence the much awaited Capex for production enhancement. Buy Backs - Shareholder s Value Enhancer The company has since the year 2000 done a buyback almost every alternate year. This had led to the company s Equity Capital coming down from 18.50 crores in the year 2000 to 14.21 crores in 2009, however pursuant to conversion of warrants by promoters and a small bonus issue to the shareholders has gone up to Rs.17 crores. The company has in past years utilised the cash available for buyback of its own shares through market purchases which has been positive in terms of enhancing of shareholder s value. The company also has an ongoing buyback which started in October 2012.
Risks & Concerns There are a few concerns though 1. There is a regulatory process for getting approvals for various government departments for drilling of wells and delays are not ruled out there. 2. The other risks are fall in the price of crude oil or an appreciation of rupee both these will have an adverse impact. Our bigger concern though is delays in regulatory approvals for drilling new wells we don t expect fall in Crude Price or strengthening of rupee as major concerns (unless of course there is a crash in crude price or significant strengthening of INR) since the increase in production volumes will more than make up for any variability in crude price and INR. Conclusion We believe the process of grant of approvals by DGH for drilling new wells has commenced (if recent approvals to Cairn and Reliance is any indication) and we expect Selan too to start getting approvals and monetisation of assets shortly. Selan Exploration has over 200 sq. km of Discovered Oil & Gas Acreage in 5 fields. All fields are Onshore fields located in Cambay basin in Gujarat. The stock of Selan Exploration has been largely rangebound for the past 3 years. The company had undertaken 3D Seismic surveys of all its five oilfields a few years back and spent close to Rs.80 crores in the Seismic Surveys. Even though the company had completed the seismic surveys in the year 2010, the company could not significantly ramp up its production from its oilfields primarily on account of the fact that the approvals for drilling of wells from the government were not coming through. If we look at the Valuation of the company, at the CMP, the company commands a market cap of roughly Rs.525 crores, the company is largely debt free and has Cash and Net current assets of roughly Rs.145 crores (as on 30.9.12). This makes the EV of the company as Rs.380 crores. With roughly Rs.60-65 crores of Cash Flows a year currently, we believe the valuations at 6 times yearly cash flows is extremely reasonable and doesnot take into account the potential of a significant production ramp up which exists here. The current scenario we believe is the base case scenario.
In the next 2-3 years, we may see a significant ramp up in the production volumes of Selan. Selan has already completed 3D Seismic studies in all its fields and we believe the next few years would just be devoted to ramping up production volumes by drilling new wells. We believe that as per our conservative estimates, the production volumes should reach around 4.5-5 lakh barrels per year, 3 years down the line (from current volumes of around 1.8 lakh barrels) Looking at the current valuations of Selan, we are reminded of a quote by Warren Buffett In business, the Rear View Mirror is often clearer than the Windshield. This we believe applies perfectly to Selan Exploration in the current scenario. Selan is a case where the last 3 years have been largely stagnant as regard its financial performance. So, if you look at Selan through the Rear View Mirror today, you will come across a company which has not done much in terms of growth in Production Volumes, Sales and Profitability (volumes have rather declined a bit because of natural reduction in volumes from the wells) in the past 3 years. However given the potential which exists, the unlocking of which will start soon, we believe when investors look at Selan in 2016 through the Rear View Mirror, they will find a company that has grown by 35-40% in the last 3 years and with good growth potential in the coming years too. This we believe would lead to 2 things One, the earnings would have grown significantly from where they are today and Two, since it would then become a growth story, there would be a significant PE Expansion. These two factors we believe will lead to a significant rerating of the stock. Moreover, conservative management and a low debt balance sheet make it a safe investment. We believe that as company starts the process of ramping up production which starts getting reflected in the financials of the company, investor focus will start shifting away from the Rear View Mirror to the Windshield, leading to a gradual rerating of the stock. In any case, the worse seems to be over for the stock. Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned
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