Multi Baggers

Selan Explorations Technology Ltd.

CMP - Rs. 75

BSE Code -530075

NSE Symbol - SELAN

With the focus of the world on Energy, we believe that Oil Exploration stocks would continue to command high valuations on the bourses in times to come. The forthcoming issue of Cairn Energy may lead to a re-rating of the stock of Selan Exploration.

Selan Exploration was incorporated in 1985 and come out with its IPO in the year 1995. The company is involved in Onshore drilling for exploration of oil and gas.

The Company which started with consulting assignments and seismic data acquisition work for ONGC, was awarded the BAKROL, INDRORA and LOHAR oilfields in Gujarat for development in the year 1993. These fields are located in Cambay basin in Gujarat. Cambay Basin is an oil rich region and has been categorized as Category I sedimentary basin meaning commercially productive region.

In the year 1997, the Company received Letters of Intent for two additional fields in onshore Gujarat viz KARJISAN, a gas field and OGNAJ, an oil field, from the Ministry of Petroleum and Natural Gas (MoPNG).

The company has been producing crude from its oilfields in BAKROL, INDRORA and LOHAR. During the financial year 2005-06 the Company produced 74,000 barrels (as against 70,800 barrels in 2004-05) of crude oil cumulatively from its three fields (viz. Bakrol, Indrora and Lohar).

The company had been buying back its shares through open market purchase from the year 2002 till the year 2004, as a result of which the Equity Capital got reduced from Rs.17.51 crores to Rs.14.0 crores.

Business Model - Relatively De-risked

Unlike other Oil Exploration companies, Selan Exploration has invested in Exploratory blocks that have a track record of proven commercial production. This benefits the company in two ways - one the company doesnot have to invest in the exploratory activities which could consume time and money and two, it means that company is not exposed to the inherent risk associated with the exploration business.

FINANCIALS

The company has been churning out good numbers for the past few quarters reporting an increase in Turnover and Profits compared to corresponding quarters of the previous years.

The latest financials of the company are given as under :-

QUARTERLY - LATEST RESULTS - Selan Explorations Technology Ltd  (Curr: Rs in Cr.)
Particulars	Quarter Ended (Sep 06)	Quarter Ended (Sep 05)	Quarter Ended  (% Var)	YTD / Latest Half  (Sep 06)	YTD / Latest Half  (Sep 05)	YTD / Latest Half  (% Var)	Year Ended  (Mar 06)  (12)	Year Ended  (Mar 05)  (12)	Year Ended  (%Var)
Sales	6.26	4.79	30.7	12.29	9.92	23.9	18.7	10.36	80.5
Other Income	0.2	0.16	25	0.47	0.27	74.1	2.91	0.43	576.7
PBIDT	4.32	3.29	31.3	8.61	7.1	21.3	14.35	2.5	474
Interest	0.17	0	-	0.35	0	0	0.24	0	-
PBDT	4.15	3.29	26.1	8.26	7.1	16.3	14.11	2.5	464.4
Depreciation	0.16	0.15	6.7	0.32	0.31	3.2	0.62	0.63	-1.6
PBT	3.99	3.14	27.1	7.94	6.79	16.9	13.49	1.87	621.4
Tax	0.01	0.27	-96.3	0.02	0.6	-96.7	0.07	0.18	-61.1
Deferred Tax	1.31	1.06	23.6	2.6	2.35	10.6	4.81	0.5	862
PAT	2.67	1.81	47.5	5.32	3.84	38.5	8.61	1.19	623.5

The company has an Equity Capital of Rs.14.41 crores with the promoters holding roughly 39%. We believe the performance of the company would be better in the second half of the current FY primarily on account of the new oil wells that have started production. For full year, we expect the company to report Sales Revenues of around Rs.28-30 crores with PAT of around Rs.13-14 crores leading to an EPS of Rs.10.



Conclusion The company currently derives bulk of its revenues from BAKROL Oilfield. The company has aggressive plans to increase Oil production from the BAKROL Oil field by drilling new wells and we expect the production to double in FY 06-07. The company is also trying to increase the production from the INDRORA Oilfield by working over the wells where there has been a drop in production.

The company has also signed up the Production Sharing Agreement with the Ministry of Petroleum and Natural Gas in February 2004 for the OGNAJ Oilfield and KARJISAN Gas Field. The company has also received the mining licence to develop these fields from Gujarat State government.

The stock available at a PE of around 7.5 times its expected profits for FY 06-07 looks undervalued for two reasons - a) the peer group commands much higher valuations and b) the company is currently focusing towards development of Bakrol Oil field & expects to substantially ramp up production over the next two years from Bakrol field - the development of the other Oil and Gas field may lead to exponential growth in the profits of the company in the years to come.

The company plans to develop the oil and gas fields in a gradual manner - funding them out of Internal Accruals and debt - without much Equity Dilutions. The company expects to deploy the strong cash flows from enhanced output for the development of other fields. The prudent financial management by the company would ensure long term wealth creation for the shareholders of the company.

Moreover, the increase in promoters stake from 32 to 39% (through buy back) was done much before the rally in Oil prices, indicating management's confidence in long term potential of the company.

Long Term investors can buy the stock at current levels and add more on declines.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.