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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