Thursday, October 8, 2009

Assam Company: An old Analysis made in mid-2008.

Q: What’s the story with Assam Company?

A: Everybody is complaining about oil. Prices of oil have risen and people can’t manage the budgets. Everybody’s afraid crude may hit USD 200/bbl. You need a hedge and that hedge is Assam Company. The hedge could well be Cairn, it could well be various other stocks but I like Assam Company because nobody expects it to do anything great in oil so the PE is quite reasonable. I have been tracking this stock for a fair amount of time and they never got beyond USD 150-160/bbl a day, Barrel of Oil Equivalent (BOE).

I think the last quarter or the last few months have actually gone upto USD 1,500-1,600/bbl a day. I suddenly see there is some critical mass happening here. It’s not going to end at USD 1600/bbl a day. The kind of reserves that they have in the Amguri block they can potentially go upto about USD 20,000-25,000/bbl a day for a number of years. So it’s not just a significant spike in one year and thereafter fade down. They can actually move upto about USD 25,000/bbl and stay there for a number of years. The interesting characteristic is that oil prices are high and it could get higher but in this business, the cost of production would not be more than USD 20/bbl even in the worst comes to worst come scenario.

So you are looking at a very interesting delta. You are looking at an average realisation of USD 130/bbl and you are looking at a total all told cost of USD 20/bbl. So you got a delta of USD 100/bbl given whatever happens, in the present circumstances. If you then calculate that, a part of this is going to be gas, and a part of this is going to be the oil. Gas is going to be a lower realisation, oil is going to be a good realisation all things considered you are looking at some humungous numbers.

The interesting part is that this is sustainable because this just keeps coming out of the ground and then there is nothing that the management- even if it were a bad management, there is nothing you can do to stop the money from flowing in. The interesting characteristic of an oil company is, when it comes in, it really comes in. People don’t make money; they get wealthy, just sitting on oil stocks.

Can it happen in this case? Firstly the company is not necessarily cheap at today’s valuation and given the kind of results that they have shown, Rs 900 odd crore valuation. The value of the reserves at today’s levels is at about USD 1.4 billion and that’s a fair amount of money.

Is the company going to get that much of money out onto the balance sheet? I think you will have to start tracking the stock on a quarter-by-quarter basis. You have got to start taking a look at its capex programme. The more the capex increases, the more is the oil starts coming out and the more the money that is transferred to the balance sheet in the P&L account. The management is actually talking about raising its output from about USD 16,00/bbl a day to about USD 3,000/bbl by the end of 2008 and very close to about USD 5,000/bbl by March 2009. Going ahead I would expect it at about USD 8,000/bbl a day by the end of 2009 or 2010. That’s going to be very significant in terms of revenues and more significantly in terms of profits.

Q: What’s a good price target to work with an Assam Company having crunched the numbers?

A: I have not been able to give a discounting to this company. The company comes in with a fairly interesting past, it’s been in tea it and had a number of subsidiary companies. My understanding is tea is going to have a good year but nobody is looking at tea. I think the company is now going to get its act together nad clean up its balance sheet. The company is probably going to have a better quality of Board, a stronger governance initiatives. So once that happens it’s anybody’s guess as to what happens with the PE. Normally I am a safe man, I go with PEs of 5-7.

When you look at very humungous Pes, it becomes a little difficult but in this case we are safe. So there are two kinds of upsides that we are looking at; earnings upside and if you get a PE upside that’s going to be a very interesting kicker. Assuming that the sky falls on everybody’s heads and we actually live with a USD 200/bbl in a day scenario, this might be an effective hedge to have.

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