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Saturday, January 8, 2011

Selan Exploration : Stock to buy in 2011

I had published a post Selan Oil Exploration: Soaked in Crude almost three years back as stock analysis for investment. It was at Rs. 150 at that time. The stock trades at around 400 now. I just thought to research a bit on it for current scenario and I found it recently recommended as multibagger stock to buy in 2011 by Ashish Chugh on CNBC-TV18. Let's see what he says.

Ashish Chugh believes that even at the current price this stock may turnout to be a potential multi-bagger stock.

The financials of Selan Exploration for the past two years have been almost flat. There was not much increase in either production. This is mainly because of the fluctuating oil prices. The revenues and profits are inline with the oil prices but there has not been any substantial increase in production in the last two years.

Selan exploration is doing 3D contour mapping for past 2 years of not just the Bakrol field, which is giving them major production as of now but for some other fields also. The new technologies which are available enables the company to identify the reservoirs where if drilling is done will give them about 10-15 times more oil than what the current wells are producing.

To calculate roughly, the company is doing about 2.5 lakh barrels every year from about 20 wells, which means that each well is giving them close to 12,000-13,000 barrels, and the new wells are capable of producing 1-1.5 lakh barrels per year, this could translate (if the company starts drilling two new wells) to double their production.

If company starts drilling wells in next 3-6 months, 10 wells would almost quadruple their oil production. This thing may get start reflecting in the company’s topline and the bottom line in probably year 2011-12. If you see the valuations at which the recent deals have taken place, if you look at Cairn-Vedanta deal, if you apply just 50% of that valuation to only the Bakrol field where we have the data for 2P reserves you get a mind boggling figure.

At the current valuation it may just be a fraction of the valuation for the Bakrol field and leave aside the other fields which are still virgin where no data has been declared and I believe this is a stock where institutional investors will find value even when the stock goes to four figure mark because by that time the production would have got ramped up significantly. Probably the 2P reserves data for the other fields might also get announced by the company and the financial numbers would start looking a lot better than what they are now. This is a company where the drilling is happening or the production is happening just in one field, which is a Bakrol field—operating margins are anywhere between 80-85%.

Once the ramp-up happens and with oil prices being steady and at higher numbers, I think this maybe a stock to watch out for in the years to come. The only thing is that as of now there are a few unknowns; the first is that when they start drilling is something, which nobody knows about but I believe that since they have already spent about two years in data acquisition drilling can happen in the next probably three to six-months. Oil exploration by nature is a risky business but I think the risk is getting mitigated because of the fact that all the fields are proven fields. So, in the years to come, we may see a massive scale up in the production of the company. This makes Selan exploration a stock to buy or at least a stock to watch out for, for the future.

Any correction in stock price towards Rs. 350 would definitely be a nice opportunity to buy stocks of Selan exploration.

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