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Selan Exploration Technology Ltd (BSE Code–>530075): Some additional Inputs (I think you have read my earlier inputs in this scrip):

Following a move by the Government of India in 1992 in opening up the oil sector for private sector in exploration and production (E & P) of Hydrocarbons, SELAN Exploration Technology Ltd, was amongst the first private sector companies to have obtained rights to develop three discovered oilfields situated in the state of Gujarat namely Bakrol, Indrora and Lohar, all with proven oil and gas reserves. SELAN was subsequently awarded two more fields in Gujarat namely Ognaj Oilfield and Karjisan Gas field.

All the oil and gas blocks have a well laid out infrastructure. Hence these blocks are easily accessible and are in close proximity to the Government’s crude gathering station as well as are in close proximity to a large industrial town.

The various seismic and reserves assessment studies have established substantial amounts of oil and gas reserves in these blocks.

SELAN thus has significant oil and gas assets in its control which require developmental work and for the purposes it would require substantial amounts of Capital investment to augment its development and growth objectives.

SELAN has a Development Plan for drilling of additional wells in these blocks in the next 32 to 3 years. The Plan is intended to be executed in a phased manner and would involve large capital expenditures, to be funded through a combination of external borrowings and internal accruals.

SELAN has significant oil and gas reserves in its control that require developmental work. The Bakrol oil field has proven 2P reserves of 72 Million Barrels of oil equivalent.
In addition to this, the company’s biggest oil field at Indrora (3.5 times the size of Bakrol field) is under assessment and is expected to have significant reserves.

Selan is expected to ramp up production from the present around 120,000 to 400,000 barrels in FY10. The company should be able to increase the annual production to 1 million barrels in the next 2 to 3 years.

Industry Outlook:

The present Crude Oil prices are ruling near all time lows and hence we can only expect higher oil price in the days ahead, especially in due to the prediction of a severe winter in USA and also due to the fact that below $72 per barrel, it become unviable to drill Crude Oil by the major players in this space. Hence we can expect that OPEC and other Oil Exporting Countries will only go on cutting the crude production in the coming months, boosting the price of crude oil in the international markets.
A crude oil price of above $60 per barrel will only boost the bottomline of standalone E&P players like Selan Exploration Technologies Ltd.

Thus, Crude Oil prices are expected to remain above $50 per barrel range for most of FY09.

Low production costs:

The company’s Oilfields are discovered oilfields, thus there are no exploration risks or too much overhead costs. The company however, incurs the seismic survey costs & drilling costs but the matter of concern is not whether there is oil but how much of it is there–this is the area which is unique to Selan Exploration Technology Ltd against other established players like ONGC Ltd or Reliance Industries Ltd.

Accordingly, the production costs are low and stand at USD 15 per barrel (including $4 royalty/cess paid to ONGC). THIS PROVES THAT AT EVEN AT $50 PER BARREL SELAN EXPLORATION TECHNOLOGIES LTD IS MAKING SIGNIFICANT PROFITS ON ITS OPERATING COSTS.

Further, the company’s capex costs for drilling a well is also comparatively lower and thus have a short payback period making drilling attractive.

Value unlocking through dilution of interest in Indrora oilfield:

Selan is expected to dilute participating interest at Indrora field in 1-2 years. It is widely expected that the investor will be strategic in nature bringing in funds as well as the expertise to drill a large number of wells. Usually participatory stake in discoverable fields get a 3-4x premium to that of an explorable oil field.

MAY BE KEEPING THIS IN MIND, THE COMPANY HAS DECIDED TO COME UP WITH A BUY BACK OF ITS SHARES AT A PRICE NOT EXCEEDING RS.230 PER SHARE—implying that the company thinks that in the days ahead, the share price of the company could shoot above Rs.230 per share.

Attractive Valuation:

On a forward P/E basis the company is trading at a very attractive multiple of around 3.8. This is significantly lower than the forward multiple of the broader market. The oil and gas industry’s downstream players generally trade at a premium to the broader market.

FY09 is likely to turn out to be another year of massive growth for Selan Oil Exploration. At the end of FY09, the estimates are, that Selan will produce close to 150,000 barrels but the realisations in FY09 would exceed could exceed $50 per barrel. Crude Oil below $70 per barrel is an unviable  proposition.

Production and Development thrust:

The promoters earlier made a preferential allotment of 18 lakh shares at Rs.165 per share bringing in Rs.30 crore into the company. These funds are now used to dig more wells over the previous year, in the existing Oil blocks, and leave some spare money to develop the Oil field at Ognaj and the Gas field at Karjisan, which are still to be leased out to Selan Exploration.

An agreement has already been signed with the Indian Oil Corporation to uplift the existing and additional production at the international rates for Crude Oil. The IOC and the State of Gujarat have also agreed to refund the levies on account of Sales Tax and surcharge on Sales Tax.

However, the most significant point is that Selan’s Crude Oil Production is set to rise to an estimated 150,000 barrels (128,000 barrels)during FY09. This quantity is double the figure recorded over the past three years and indicates that Selan Oil is ready to scale up its business operations.
Assuming even 25 per cent of the Oil Reserves are recoverable, a market cap of only Rs. 180 Cr indicates a massive under-valuation of the Selan stock.

More importantly, private oil field operators are not subjected to subsidy sharing beyond the Oil equity due to the GOI, and hence stocks like Selan do not carry operative risks like other E & P operators like ONGC.

NOW WITH THE COMPANY COMING UP WIIH A BUY BACK OF THE SHARES AT A PRICE NOT EXCEEDING Rs.230 per share, we can only assume that the shares would move up in the coming days.

Hence I would not be surprised if Selan Exploration Technology Ltd gives significant appreciation from the CMP of Rs.125, in the next 6 to 7 months time frame. ONE SHOULD REMEMBER THAT CRUDE OIL BELOW $72 PER BARREL BECOMES UNVIABLE FOR MOST OF THE INTERNATIONAL PLAYERS IN THE OIL EXPLORATION SPACE. But since the exploration cost of Selan Exploration Technologies Ltd is much less, it makes profit even when the Crude Oil is trading around $50 per barrel–this makes this company unique.

I HOPE YOU HAVE EARLIER READ MY INPUTS ON ROLTA LTD. The links to the earlier inputs are there on the right hand side of this web-page of this web-site.

Moreover, keep accumulating Vikash Metal and Power Ltd, in view of the fact that the steel companies are not expected to cut down the price of its products, unless there is a significant price reduction of the raw materials.
“Indian steel makers are unlikely to cut product prices further unless there is a significant fall in raw material prices” said, S.K. Roongta, chairman, SAIL.
What is important is that Vikash Metal and Power Ltd has a power story in place and I have read a recent report that Govt looking at stimulus package for power sector.
“We are looking at a package, if need be, to liberalise on financing as far as private sector producers are concerned. If we see a high mortality of projects, we will ensure thatpower projects will be implemented. The Government is meeting with private sector power producers in this regard”, Jairam Ramesh, Union Minister of State for Power told reporters in Mumbai yesterday.
In the 11th Five Year Plan, the target capacity to be added was 79,000 mega watts, he said. “Of this, roughly 20 per cent is in the private sector, which seems broadly on schedule,” Ramesh said, adding that India has done well by commissioning 18,000 mw in the first two years of the 11th Plan (from 2007-2011).

MOREOVER, ONE SHOULD KEEP ACCUMULATING KEC INTERNATIONAL LTD, BGR ENERGY LTD, AND RELIANCE INDUSTRIAL INFRASTRUCTURE LTD, DUE TO THEIR HIDDEN VALUES.

NOTE; I HAVE POSTED THE INPUTS  ON SELAN EXPLORATION TEFCHNOLOGIES LTD, MORE THAN ONCE, BECAUSE DUE TO INTERNET PROBLEMS AT MY END I AM NOT ABLE TO SEE WHETHER IT HAS BEEN POSTED EARLIER OR NOT IN THIS WEB-SITE. If you (or anyone) find/s more than one writing on the same topic please ignore the rest…..moderators can delete the rest and keep only one of the said writings.

Best wishes,
Suman Mukherjee
India.
http://www.sumanspeaks.blogspot.com

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