We added Selan exploration to model portfolio recently here is my detailed analysis.

About

SELAN is engaged in oil exploration and production of crude oil and natural gas. The seismic data acquisition being undertaken for the Company’s oilfields has been completed. The Company’s oil fields are located in Bakrol, Indrora and Lohar oilfields in the State of Gujarat. The Company also has Ognaj oilfield and Karjisan gasfield situated in the State of Gujarat.

 

Now first of all if you don’t understand E&P business its better you avoid this one. This is a complex industry which requires detailed study.

Look at the production levels for company

Year Lohar Indora BAKROL  TOTAL
OIL GAS OIL GAS OIL GAS OIL GAS
(1000 Tones) mm3 (1000 Tones) mm3 (1000 Tones) mm3 (1000 Tones) mm3

2004

2.64

0.04

0.79

0.04

5.54

0.13

8.97

0.2

2005

2.82

0.04

0.86

0.04

6.16

0.14

9.84

0.22

2006

2.63

0.04

0.74

0.03

7.02

0.16

10.38

0.24

2007

3.87

0.06

0.81

0.04

9.58

0.22

14.27

0.32

2008

4.98

0.08

0.98

0.04

13.4

0.31

19.36

0.44

2009

6.07

0.1

0.69

0.03

33.85

2.31

40.61

2.44

2010

5.76

0.1

0.64

0.03

29.28

10.26

35.67

10.39

2011

5.83

0.1

0.56

0.03

21.16

9.9

27.55

10.02

2012

8.61

0.14

0.58

0.03

16.45

9.34

25.64

9.51

2013

8.61

0.14

0.87

0.04

13.56

9.24

23.03

9.43

Source: Profit Analyzer

They have remained more or less stagnant for last 3 years

Why I liked this stock and what interested me

Obtaining approvals for drilling which was long pending in new wells in Bakrol and Indrora. As mentioned by Management, they expect significant increase in production from these new wells. This will significantly improve EPS and then likely to increase stock price over next  18-24 months

It is largely a debt free company, for a large capital intensive company that is a very positive sign

What needs to continually happen or what is the key assumption

I think for price movements from here on, the only question is a) whether the company keeps getting permission to drill wells,  and b) whether these wells are productive, and whether production of oil and gas is indeed increasing, month on month.

If this is happening then the value of stock will continue to go north. Therefore this is the biggest risk as well.

 

Generic industry risks

Increasing cost due of raw materials

Competition and govt policies affecting operational efficiency

Company needs a lot of capital and the rising lending rates is a big threat for the company

Economic instability and fluctuations in India’s policies

Financials

Quality of financial reporting

The company has been excellent on both parameters below

Slide1Value of stock

 Slide2

Given the production has remain constant over last some years, valuation on basis of earning is very subdued at almost at 50% of current market price

Also since production was constant the cash flow numbers have remained constant, reflecting intrinsic value of INR 279. The company has been able to generate constant free cash flow, would expect it to continue.

On a growth basis the company seems attractive available at 40% discount.

Download complete financial analysis Selan_Analysis_latest

Some numbers for crunchers !!!

Cash flow growing at 10%

Revenues growing at -0.72%

Profit growing at -0.80%

Book value of share increasing at 3.43%

Not very exciting as they cover last 4 year history

 

Like life stocks too have divergent views

Read below

Positive review

Negative review

As always have a nice weekend

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PS – Stocks discussed here are for educational purpose. Please don’t buy based on this do your independent research. It is very easy to lose all your money in stock markets.