Scripscan:Selan Explorations Technology Ltd
Long term Returns expected:30% CAGR for next 5 years.
Note:Trying to pen in most simple words.Please read it meticulously and understand why you need to buy the stock.
Story:Selan Exploration is into exploration & production of oil & gas.It currently operates 5 small fields in Cambay onshore-Lohar, Bakrol, Indrora, Ognaj and Karjisan.These oil fields were awarded to the company in 1995-2000 under a Production Sharing Contract (PSC) with 100% participating interest by the Government of India.Selan was subsequently awarded two more fields in Gujarat namely Ognaj Oilfield and Karjisan Gas field.In-place resource stands at 73 mmbbl(million barrels)& 7 mmbbl in Bakrol & Lohar respectively.Production level is currently at ~660 bpd(barrels per day).The company sells its crude output to Indian oil at a discount of 5% to Brent.Five points to qualify Selan exploration as a great medium to long term buy.
1)As of now, the company is producing oil from only 2 fields,Bakrol & Lohar.Management has also indicated that Indrora Oilfield contain far larger quantities of recoverable oil than Bakrol.Let us conservatively assume 100 Million Barrels of Oil Reserves under Selan.Selan's reserve would get valued at many a thousand crores.Selan recently has completed drilling of 2 wells, commercial production is expected to happen any day now.Further drilling is also going on.Company has a marketcap of only 500crs.It delivered a revenue of 97crs and PAT of 45crs respectively for the last fiscal 2012-13.
2)Previously, the technology recovery rate of exploration activities was ranging from 10-20% from the total potential reserves in Gujarat.But with the latest technology implementation of 3D contour mapping this recovery rate has gone up to as high as 50-60% for the similar fields.Contour mapping is just like a magnetic resonance imaging(MRI) scan of a human body.Stunning management quality and they are committed to make huge amount of shareholders wealth in the coming years.It buybacks(7 buybacks in the last 10 years),it allots warrants,it generates huge amount of cash,it has got a wonderful under leveraged balance sheet.Selan is one sure shot winner for the longer run.
3)Numbers has been flattish so far over the last few years as it was consolidating its resources and investing a lot in its proven fields.Over the next few quarters the company would actually be in a position to ramp up production massively and deliver an EPS of 60(2014-15).Value it as per the sector and the valuation would be in 4 digits.Even if at the present juncture we see the valuation of selan;EV/reserves of less than 1,marketcap to sales of around 5 with high double digit return ratios,its the cheapest oil exploration company in the bourses.
4)Selan's production cost is $11 per barrel, which is reasonably low.Company pays $5 per barrel as Royalty to the government.The stock has delivered an annualized return of over 41% from 2003 to till date,much superior to the broader market(Selan was at 10rs 10 years ago).Hell,its even higher than what "Warren Buffet Sahab"s berkshire hathaway delivered in the same period.In my view creating and delivering shareholder value has been well handled by Selan. Selan is now all set to start the process of returning value to shareholders while they continue the value creation process.
5)Crude oil demand is projected to increase to about 1600-1800 mn barrels per year. Rising global crude oil prices have triggered increased domestic exploration and production activity.All this factors makes Selan a big beneficiary and helps one to have a lot of conviction on the stock.Selan posses robust fundamentals,amazing pedigree quality,mind boggling prospects,low business risk.Over the next few quarters it can have a production level of about four to five lakh barrels per year, which can lead to a cash flow of over Rs 150 crore.Have put a 8 times forward earnings to arrive at the target price.Selan is a stock which can be kept for lifetime.Make it a part of your core portfolio folks.
btw:People looking for midcap/smallcap positional call professional service may rush a mail at my mail id firstname.lastname@example.org to know more about it.