Selan exploration, stock analysis. ~ Shareholder Awareness Program

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Selan exploration, stock analysis.




Karjisan oil well of selan exploration limited


Selan exploration, one of the few stocks with negative enterprise value.


Article published as on Monday, 16th April, 2020 at 10:30 a.m.   


Now a days I am wondering what kind of logic does work in stock market? Some stocks have sky high valuations multiple and some are trading at such steep discount. It is said that market corrects itself in the long run.

Well what is the long run for crude oil? 

It had been used as source of energy for over a century.
Certainly with the electric revolution there isn’t any future to it right?

Well crude has many applications from lubrications, paints, plastics, Vaseline jelly, and has other industrial applications as well. So the electric revolution would certainly not make fossil fuel extracting companies go out of business anytime soon. 

Use of Crude will stay here for some years, but not long, that is the reason why reliance has diversified itself from its core crude producing business.

A look at crude producing company, which trades at negative enterprise value. 

Its Selan exploration! 
Another little known company which is into exploration and extraction of crude oil into the state of Gujarat.

Let us understand its business model, strengths and weakness.


Company background.

It was incorporated in 1985 originally as a consultant to ONGC, afterwards it went into exploration and extraction of crude.
It has 5 major oil and gas fields in state of Gujarat, namely Bakrol, Lohar, Indrora, Karjisan, Ognaj.

So as I said it operate in oil and gas sector, it has its fields in Gujarat which are taken on lease from government of India. But they have 100% equity ownership in development of oil fields.

Under the production sharing contract (PSC) with the government its entire production is guaranteed to be bought by government, thus having zero marketing risk.
IOC purchases its oil at 3% less than prevailing market price of Brent.
Also is it has to pay government of India royalty of 3$ per barrel.

It has lifting cost per barrel of oil equivalent (BOE) around 12$-13$ for it major oil fields in the year 2018-2019.
That’s the recurring cost for extraction of crude oil from its well.
So it has huge gross margins and can stand in tough times like these even when oil is trading around 20$ per barrel

It has large amount of proven reserves in its oil fields by some estimates 
8.64 Crore BOE oil 
If we value at USD INR @ 75 
And Brent at 20$ per barrel 

The valuation of its proven reserves is 12,961 crores. 
Now this is not the profit, this is the amount of oil which could be recovered so this is revenue estimate.

Now the fields are leased from government of India, so these figures don’t mean anything unless they actually extract crude from it.

Let’s look at some of its financials in the table
And calculate its enterprise value.

EV=   market cap+ debt – cash and cash equivalents

particulars
Figures in lakhs as on 31/3/2019
    Financial assets -
         investment
     13256.51
         Cash and cash equivalents
       1846.37
          Bank balance
         188.32
          Other financial assets
        227.25
Total
    15518.45

Long term debt
Figures in lakhs as on 31/3/2019
    Borrowings
51.57
Share price - 82 INR (as on 9/4/20)
Market cap 124.64 crores

So by this calculations let’s find out the enterprise value (figures in lakhs)

EV=   market cap+ debt – cash and cash equivalents
EV= 12464         +51.57 – 15518.45
EV= - 3002.88 (negative 3002.88 lakhs)

 You get more money in the company than you invest in it, plus you gets its business absolutely free of cost.

Somewhat similar to buying pant worth 200INR which has 200 INR in its pocket



(read my example in the article by clicking here )

Even its business is solid

Consider the following fundamental factors:


·        Almost zero debt

·        325.80 crores of reserves on market cap of 124.24 crores.

·        Cash on balance sheet as on FY 2018-19 was 155.18 crores

·        Stead growth in sales and profits in last 10 years.

·        Operating margin of more than 50% to 60%

·        Great cash flow from operations in last 10 years.

·        Large oil reserves yet to be explored, possible triggers.

·        It trades at P/BV (price to book value) of 0.41, one of the lowest among its peers also it trades at P/E of around 3.4 and trades at negative enterprise value.


Unlike cash rich oil producing PSU's like ONGC or IOC this company does not give hefty dividend. And instead invest in safe debt mutual funds (Franklin Templeton ultra-short bond fund)

Every detail is given in annual report regarding its investments.


The discount can’t stay forever-


Oil is something without which the world cannot move.

Once the world gets out of the current lockdown and trade and commerce resumes once again along with limited reserves of oil, the prices are unlikely to stay here at the bottom for long.


Management realises the stock is undervalued and taking steps to rectify it:

Selan exploration held a buyback program and bought shares around 160-180.

Buyback program concluded in July 2019.

It was meant to support share price as it was undervalued.


Looking at conditions the buyback cool down period is of 1 year, so if the share prices remains depressed management may go for another buyback after July. 

After all its intrinsic value is way above than market value.


With zero marketing risk, as their production is guaranteed to be bought by IOC, and lower lifting cost, its profits may dip but it won’t go into losses.


Another reason this stock is ignored by investor is because it is not glamorous. It is also not into any innovative business and just holding onto cash and investing it.


Management is doing great work of making profits and investing it safely for shareholders.


This stock surprises me, but there are always reasons for the prevailing price of stocks, in this case its business is the problem with very little growth prospects and the current price war in crude its margins and profits are sure to plunge.


Conclusion


This stocks is undervalued compared to historical valuations. And trading at irrational valuations as of now.


This stock is unlikely to reduce further in price as it hold massive cash in its chest. Any downside could be contained through future buyback programs.


Investor can use this stock as crude oil hedge instrument.


(Disclaimer- figures are going change as the given figures are of FY2018-19.
This is just my study of selan exploration, one shall do his/her own study before taking any call.)


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