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Friday, September 12, 2008

Selan Oil-Buy This Stock - On Sizeable Correction

Selan Oil-Buy On Sizeable Correction
Investment Rationale


Production scale-up
SELAN has significant oil and gas assets in its control that require developmental work. The
Bakrol oil field has proven 2P reserves of 72 Million Barrels of oil equivalent. Further, the
company's biggest oil field at Indrora (3.5 times the size of Bakrol field) is under assessment and is expected to have significant reserves.

The company has a development Plan for drilling of additional wells in these blocks in the next 3 to 5 years. The plan is intended to be executed in a phased manner and would involve large capital expenditures, to be funded through a combination of external borrowings and internal accruals. We expect the company to ramp up production from 120,000 barrels in FY08 to 400,000 barrels in FY10. The company should be able to increase the annual production to 1 million barrels in 3-4 years.

Strong Industry outlook
Higher oil price will boost the bottomline of standalone E&P players like Selan. With marginal cost of production in offshore non-OPEC areas reaching the levels of US$50-70/bbl, non-OPEC incremental production not able to meet incremental demand, and OPEC's continuing stance of not increasing production, we expect oil prices to remain firm.

MUST READ: Selan Oil Exploration: Soaked in Crude

Low production costs
The company's Oilfields are discovered oilfields thus there are no exploration risks. The
company incurs the seismic survey costs, drilling costs and the matter of concern is not
whether there is oil but how much of it is there. Accordingly, the production costs are low and stand at USD 15 per barrel (including $4 royalty/cess paid to ONGC). Further, the company's capex costs for drilling a well is also comparatively lower and thus have a short payback period making drilling attractive.

Value unlocking through dilution of interest in Indrora oilfield
We expect the company to dilute participating interest at Indrora field in 1-2 years. We expect the investor to be strategic in nature bringing in funds as well as the expertise to drill a large number of wells. Usually participatory stake in discoverable fields get a 3-4x premium to that of an explorable oil field.

Attractive Valuation
On a forward P/E basis the company is trading at a very attractive multiple of 7.22. This is
significantly lower than the forward multiple of the broader market. We expect the oil and gas industry downstream players should trade at a premium to the broader market.
On EV/MMBOE ($) basis and taking into account the company's 2P reserves from Bakrol oilfield of 72 Million barrels, the company is valued at an attractive $1.25/barrel considering the latest OVL bid at $2.77 per barrel of 2P reserves of Imperial energy.

Low Debt Company
Selan has a Debt/Equity ratio of 0.15 thus it will not be affected by high interest costs. Further, the company can take on leverage to fund and support its growth at competitive rates.

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