Saturday, September 17, 2011

Selan can touch Rs 500

We like Selan Exploration Technology because it has got the rights to develop oil fields in the state of Gujarat and we think that there is going to be a very strong volume-led growth over the next 2-3 years from current production of about 2-2.25 lakh barrels, the management expects this to go upto about 5-7 lakh barrels over the next 2-3 years."
He further added, "We have also seen a strong realization improvement in the last two quarterly numbers. When you look at the valuations on most of the parameters whether on a price to earnings or on an EV to EBITDA or even on the basis of the probable reserves that the company has, the stock is quoting at a substantial discount to companies like ONGC or Cairn. Though it is a smaller capacity, the valuation gap is extremely high and the company has a very high operating profit margin. So we think that this stock can give an upside upto Rs 500 over the next 1 year."

In Q1FY2012, the net revenues (adjusted for the petroleum profit) of Selan Exploration Technology (Selan) grew by 42% backed by a stupendous growth (of 46%) in the realisation in line with the crude price movement. However, the volume remained flat year on year (YoY) at 47,217 barrels. Sequentially, the sales grew by 24%, which is a reflection of the growth in both volume (up 10%) and realisation (up 13%). The operating profit margin (OPM) was reported at 73.6%, an expansion of 118 basis points YoY, supported by high realisation. The operating profit grew by 44% YoY to Rs18 crore. Sequentially, the operating profit grew at a significant rate of 64% as expenses declined by 27% while sales grew at 23% quarter on quarter (QoQ). The administrative and employee expenses declined largely over Q4FY2011. This could be attributed to the adjustment done at the last quarter of the last year.”
“The management has indicated that it has commercialised two wells from the drilling activity undertaken at the Lohar oilfield. The company aims to drill 18-20 new wells in the next two years, subject to regulatory approval. In terms of its medium-term guidance the management expects to more than double the production to 500,000 to 700,000 barrels over the next two years and has roped in a highly experienced team to manage the operations under the leadership of Andrew Wenk as the president and chief executive officer of the company. He has two decades of experience in the oil exploration industry with stints in companies like Cairn India (Rajasthan block) and Reliance Industries (the Krishna- Godavari basin). Consequently, we have revised our production volume estimates for FY2013 (4.48 lakh barrels, assuming 12 wells get commercialised from the current drilling plan) and accordingly our EPS estimate for FY2013 stands at Rs41.9 (up from Rs38.4 earlier). The FY2012 estimates get revised upwards due to the higher than expected realisation, which is currently Rs28.3, against previous estimate of Rs23.4.”
“Given the company’s aggressive drilling programme, we expect Selan’s net revenues and earnings to grow at a compounded annual growth rate (CAGR) of 47% and 49% respectively over FY2011-13, driven largely by volume growth with an assumption of flattish realisations. At the current market price the stock is available at 4.5x FY2012E and 2.7x FY2013E of EV/ EBITDA multiple. We maintain our Buy recommendation on Selan with a price target of Rs500 (based on EV/ EBITDA FY2013E multiple of 5.5x),” says Sharekhan research report.


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