Selan Exploration - Anagram - 19 09 09 Indian Stock Markets money.umakant.info

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					RESEARCH REPORT
SELAN EXPLORATION AND TECHNOLOGY LTD
Date: 19th September, 2009

CMP: Rs 298

ACCUMULATE BUSINESS OVERVIEW

TARGET PRICE : Rs. 340

BSE Code NSE Code

530075 SELAN

Selan Exploration is an independent energy company engaged in the exploration and production of crude oil. Currently, it carries out its crude oil productions activities in Bakrol, Indrora and Lohar oilfields in Gujarat.

KEY DATA
Sensex 52 week H/L (Rs) Aug month H/L (Rs) Market Cap (Rs Cr) Avg. daily vol. (6m) Face Value (Rs)
Source: Capitaline

16741 324/100 324/183 424 87071 10

INVESTMENT RATIONAL  Potential of huge oil reserves : The company has five oil and gas fields in Cambay basin in Gujarat. Currently, the it has proved and probable oil reserves of 73.6 mn barrels in Bakrol field. Indrora oil field has large quantity of recoverable oil. The company is yet to start activities at Karjisan and Ognaj. Technology recovery rate: Currently, the technology recovery rate of exploration activities is ranging from 10-20% from the total potential reserves in Gujarat. But with the new technology implementation this recovery rate has gone up to as high as 50-60% for the similar fields.

SHAREHOLDING PATTERN (%)
Promoters Foreign holding Non-promoter corp. holding Public & Others
Source: Capitaline

41 10 8 41



ONE-YEAR PERFORMANCE: (REL. TO SENSEX)



Valuation : We our recommend DCF Investors can accumulate it with the Selan exploration we find between 295-275 with a target price of Rs. 340/share based on valuation. Comparing peers, EV/Reserves is 1.1, Market Cap/ Sales is 4 and RONW is 46% for the company. Looking at such attractive valuation parameters, we feel the stock is undervalued.

Source: Capitaline

Anagram Research is also available on Bloomberg <Code ANGM> and ISI Emerging Markets Web site: www.anagram.co.in Anagram StockBroking Ltd: Bandra Kurla Complex, Bandra(E), Mumbai 400 051. Ph: 42198100. Regd. Office: Anagram House, Darshan Society Road, Nr Commerce Roads Circle, Navrangpura, Ahmedabad – 380 009.

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BUSINESS DESCRIPTION
Selan Exploration is a Gujarat based independent energy company engaged in the exploration and production of crude oil. The company carries out it operations through one reportable business segment namely, crude oil production. Currently, the company carries out its crude oil productions activities in Bakrol, Indrora and Lohar oilfields in Gujarat . These oil fields were awarded to the company in 1995 under a Production Sharing Contract (PSC) with 100% participating interest by the Government of India. Further, the company has signed an agreement for the Ognaj oilfield and the Karjisan gas field with the Ministry of Petroleum and Natural Gas (MoPNG). The company acquired, developed and studied various seismic and reserves assessment studies to expand its oil and gas activities in these blocks. Further, it has planned to drill additional oil and gas wells in these blocks in the near future. Selan Exploration carries on efforts in terms of seismic data acquisition, work over of existing wells and drilling of new wells to accelerate the crude oil production. In August, 2008, the company was awarded the mining lease for its Ognaj oil field by the government of Gujarat. Subsequently, possession of the oilfield has also been handed over to the Company by ONGC. During the year 2009-10, the company shall undertake identification of prospective well locations in Ognaj oilfield in order to initiate development activities.

Operational Overview PRODUCTION GROWTH FOR 5 YEARS (in bbls)
350000 300000 250000 200000 150000 100000 50000 0 2005 70206 73875 5% 2006 Production 106909 45% 2007 123097 CAGR 33% 287382 133% 160% 140% 120% 100% 80% 60% 40% 15% 2008 Growth 2009 20% 0%

Crude oil production is from the fields of Bakrol, Indrora and Lohar in Gujarat

For the fiscal year 2009, the company had proven and probable reserves of 73.6 mmbbls in its Bakrol Oilfield.

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INDUSTRY OVERVIEW Growing Domestic Energy Demand : The significant growth in India’s economy over the past decade has led to increase in domestic energy consumption. Increase in demand for petroleum products in India has lagged behind the growth in GDP. During 5 years, the consumption of petroleum products has grown from 108 mnt in FY04 to 133 mnt in FY09 representing CAGR of 4.4%. Over the past 5 years, domestic natural gas consumption has grown from apprx. 29.5 bscm for FY03 to 41.4 bscm for FY08 representing a CAGR of 7%.

CONTRIBUTION OF OIL AND GAS NEARLY 40% OF ENERGY SOURCES IN INDIA

120% 100% 80% 33% 60% 40% 20% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Crude Oil 2006 2007 Coal 2008 52% 50% 49% 49% 49% 49% 50% 50% 51% 52% 52% 53% 34% 36% 36% 36% 36% 36% 35% 33% 32% 31% 31% 1% 6% 8% 1% 7% 8% 1% 7% 8% 1% 6% 8% 1% 6% 8% 1% 5% 8% 1% 5% 8% 1% 6% 8% 1% 6% 9% 1% 7% 9% 1% 7% 9% 1% 6% 9%

Nuclear

Hydro Electric

Natural Gas

(Source: BP Statistical Review of World Energy 2009)

Crude oil demand is projected to increase to about 1393 mn barrels per year by 2012. Rising global crude oil prices have triggered increased domestic exploration and production activity. Gas demand is expected to reach 330 mscmd by 2012 which represents a CAGR of 10% for the period between 2005 and 2012.

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DOMESTIC OIL AND GAS PRODUCTION Domestic reserves of crude oil have declined over the 5 year period ending FY08, from 5431.5 mbbls to 5314 mnbbls. Domestic gas reserves have increased at a CAGR of 7% over the same period from 751 bcm to 1055 bcm.

DEFICIT IN PRODUCTION AND CONSUMPTION OF OIL AND NATURAL GAS IN INDIA

80%
70% 60% 50% 40% 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 8% 17% 22% 59% 62% 68% 65% 68% 69% 71% 70% 70%

68%

72% 73%

26% 25%

2007

2008

Crude Oil Deficit %
(Source: BP Statistical Review of World Energy 2009)

Natural Gas Deficit %

Domestic Exploration Activity: As on April, 08, India’s total hydrocarbon resources including deep water resources are estimated at 205.9 bbbls of oil and oil equivalent gas of which 37% is onshore and remaining is offshore. India is estimated to have an initial in place oil and oil equivalent gas reserves of 66.96 bbbls and 24.93 bbbls of oil and oil equivalent gas in its ultimate reserves. In the last 8 years, India’s national oil companies, private and joint venture companies have made 183 discoveries of which 60 are in NELP blocks. During FY08, a total of 67 discoveries were made of which ONGC made 38 discoveries, Oil India made 8 discoveries and the private and joint venture companies have made 21 discoveries. These discoveries were made in Kutch and Mumbai basins, western offshore, KG basin, eastern offshore, Upper Assam shelf, Krishna Godavari offshore, Mahanadi NEC offshore, Gulf of Cambay, on land Rajasthan and Cambay basin.

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INVESTMENT CONCERN  Business Risk :

.

Data acquired for seismic evaluation of oil fields and reservoir involves interpretation by technology advanced software and equipment which is capital intensive in nature and are prone to obsolescence and uncertainty in results.  Oil Price Fluctuation : The fluctuation in international oil prices as well as in the dollar value will add to uncertainties in profits in the oil industry.  Project Constraint : There has generally been a shortage of drilling rigs and associated oilfield services in the region where the company operates. Since there are limited number of service providers, hence in order to execute its scheduled drilling programme it has to tie up with service suppliers a year in advance.

VALUATION :    Selan Exploration Technology Ltd‘s NPV at Rs 340/share on DCF valuation for the business. Our sensitivity analysis shows that 100bps rise in WACC implies 7-9% downside to NPV estimates. We have used beta of 1x for the business of oil exploration. Based on the assumptions we estimate WACC for the business to be 13.7%.We have used 2% of terminal growth for the oil exploration business.  Comparing it with the peers, we find EV/Reserves is 1.1 while the average for the exploration companies in India is 6. Market Cap/ Sales is 4 while the Industry average is 24. RONW is 46% for the company which is much higher compared to other exploration companies. Looking at such attractive valuation parameters, we feel the stock is undervalued. Sensitivity Analysis on DCF Valuation
Terminal growth rate % 340 WACC % 10 11 12 13 14 0.5 445 401 365 335 309 1.0 462 414 376 343 316 1.5 481 429 387 353 323 2.0 503 446 400 363 332 2.5 527 464 414 374 341

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FINANCIAL PERFORMANCE NET SALES GROWTH (in INR Crs)

.

120 100 80 60 40 20 0 FY07 FY08 Net Sales

99.9 190% 84.0

100.4

250% 200% 150% 100%

Management

is

expecting volumes in the range of 2,50,000 barrels FY11E to for FY10E. the onwards

40% 26.2

34.5

32%
-16% FY09

20%

50% 0% -50%

company is expecting deliver higher returns as production is likely to ramp up.

FY10E FY11E % growth

EBITDA AND PAT MARGINS (in INR Crores)

80 70 60 50 40 30 20 10 0 FY07 EBITDA FY08 PAT 36.8% 32.0% 15.7 8.4 20.8 12.7 60.0% 60.2%

72.4 72.4% 72.0% 60.4

73.5 73.2%

80% 70% 60%

46.6 46.7% 40.7% 34.2

41.4% 41.5

50% 40% 30% 20% 10% 0%

EBITDA

margins

are

likely to remain at the same levels for FY10E.

FY09 FY10E EBITDA margins

FY11E PAT margins

ROE AND ROCE
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% FY07 FY08 ROCE FY09 FY10E RONW FY11E 21.3% 18.9% 23.2% 22.1% 29.5% 27.4%

46.3% 45.2% 29.7% 25.3%

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Crude Prices (USD/ bbl)

Sensitivity Analysis on Crude Oil Prices and its impact on Selan Expl. Tech. Ltd
60 Revenue PAT EPS Impact on Price Per Share
(Exc rate INR 48.2)

70 108 38 26 296

80 179 55 38 378

90 242 69 48 461

100 309 80 55 543

72 29 20 214

PEER VALUATION :
Market Cap 25200 248301 50101 4584 424 Mkt Cap/ Sales 3 2 35 54 4

Companies Oil India Ltd ONGC Cairn India HOEC Selan Exp. Tec. Ltd

Price 1050 1161 264 351 298

P/E 10 17 388 87 12

EPS 101 67 1 4 25

BV 439 368 169 81 71

EV 16457 245241 47337 4438 412

P/B 2 3 1 4 4

EV/EBITDA 6 9 47 58 8

RONW 23% 25% 2% 4% 46%

Companies (Inr Crs)

Enterprise Value

Total Reserves in mn boe

EV/Res

Oil India Ltd ONGC Cairn India Selan Exp Tec Ltd

16457 245241 47337 402

946 9049 815 73.9

3.6 5.6 12.1 1.1

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FINANCIAL OVERVIEW – PROFIT AND LOSS A/C
Particulars (In INR Crs) Net Sales % growth Expenditure Power and Fuel cost Employee Cost Other Manufacturing Exp Selling and Admin Exp Misc Expense Cost of sales EBITDA % margins Depreciation Gross Profit Gross Profit Margins Interest Other Income PBT PBT Margins % Tax Net Profit Net Profit Margins % Net Profit after MI Reported Net Profit

.
FY09 99.9 189.9% 0.2 1.5 48.8 11.5 10.5 27.5 72.4 72.4% 1.0 71.4 71.5% 3.4 2.8 70.8 71% 24.2 46.6 47% 46.6 46.6 FY10E 84.0 -16.0% 0.2 1.5 40.3 8.8 8.0 23.5 60.4 72.0% 6.5 53.9 64.3% 4.6 2.4 51.8 62% 17.6 34.2 41% 34.2 34.2 FY11E 100.4 19.6% 0.3 1.5 47.2 9.0 9.0 26.9 73.5 73.2% 8.0 65.5 65.2% 5.4 2.9 62.9 63% 21.4 41.5 41% 41.5 41.5

FY08 34.5 31.8% 0.1 0.9 17.0 5.5 4.9 13.7 20.8 60.2% 0.7 20.0 58.1% 1.7 1.2 19.5 57% 6.8 12.7 37% 12.7 12.7

BALANCE SHEET
Particulars (In INR Crs) Equity Share Capital Total reserves Total Shareholders Fund Secured Loan Unsecured loan Total Debt Deferred Tax Liability Total Liabilities Fixed Assets Gross Block Less Acc Depreciation Net Block Capital Work in Progress Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Current Liabilities Provisions Net Current Assets Total Assets 14.0 9.1 4.9 54.9 7.3 11.5 23.6 7.6 50.0 11.0 8.1 30.8 90.6 17.0 10.1 6.9 91.3 11.3 9.9 46.9 12.2 80.2 9.4 11.0 59.8 158.0 108.3 16.6 91.7 30.0 9.0 7.8 44.8 14.6 76.1 3.9 11.0 61.2 182.8 138.3 24.6 113.7 40.0 9.9 8.8 45.0 18.2 81.9 4.1 11.0 66.8 220.4

FY08
14.4 40.3 54.8 16.6 0.0 16.6 19.3 90.6

FY09
14.3 86.4 100.7 25.1 0.0 25.1 32.2 158.0

FY10E
14.3 110.6 124.9 25.1 10.0 35.1 22.8 182.8

FY11E
14.3 149.6 164.0 35.1 10.0 45.1 11.4 220.4

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CASH FLOW STATEMENT
Particulars Profit Before Tax Depreciation Interest Cash flow from operations Changes in working capital Taxes paid Net Cash from operation Capital Expenditure Change in Investments Net Cash from Investing Increase/decrease in debt Dividends Proceeding from equity Interest Others Net cash from financing Net Increase/Decrease in Cash Opening Cash Balance Closing cash balance

.

FY08 19.5 0.7 1.7 22.0 -2.7 6.8 17.9 -10.4 0.0 -10.4 5.5 -2.5 0.0 -1.7 4.5 5.7 13.3 10.3 23.6

FY09 70.8 1.0 3.4 75.2 5.7 24.2 45.3 -39.4 0.0 -39.4 8.5 -2.5 -1.2 -3.4 15.9 17.4 23.3 23.6 46.9

FY10E 51.8 6.5 4.6 62.8 3.5 17.6 41.7 -30.0 0.0 -30.0 10.0 -2.5 0.0 -4.6 -16.8 -13.9 -2.1 46.9 44.8

FY11E 62.9 8.0 5.4 76.4 5.4 21.4 49.6 -40.0 0.0 -40.0 10.0 -2.5 0.0 -5.4 -11.4 -9.4 0.2 44.8 45.0

RATIO ANALYSIS
Particulars (In INR Crs) Market price (Rs) EPS – RS. EBIDTA % PBT % PAT % EV- Rs. Crores EV/EBIDTA EV/Sales Book Value's per share P/E Ratio P/BV Face Value Dividend % ROCE % ROE % BalanceSheet Ratios Debt-Equity Ratio Current Ratio Debtor Days Creditor Days Interest Cover Ratio 0.3 2.6 121.3 225.4 11.9 0.2 3.9 36.2 68.0 21.4 0.2 5.1 34.0 56.0 13.3 0.2 5.4 32.0 54.0 13.6 FY08 298 8.8 60.2% 56.5% 36.8% 429.9 20.7 12.47 37.97 34.4 8.0 10.0 17% 22.1 23.2 FY09 298 32.6 72.4% 70.9% 46.7% 412.1 5.7 4.13 70.30 9.3 4.3 10.0 5% 45.2 46.3 FY10E 298 23.9 72.0% 61.7% 40.7% 424.2 7.0 5.05 87.25 12.7 3.5 10.0 6% 29.5 27.4 FY11E 298 29.0 73.2% 62.7% 41.4% 434.0 5.9 4.32 114.49 10.4 2.6 10.0 5% 29.7 25.3

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DISCLAIMER
This document has been prepared by Anagram Stock broking Ltd. (Anagram), for use by the recipient only and not for circulation. The information and opinions contained in the document have been compiled from sources believed to be reliable. Anagram does not warrant its accuracy, completeness and correctness. This document is not, and should not be construed as, an offer to sell or solicitation to buy any securities. This document may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose without prior permission from us. Anagram and the analyst(s), including his dependant family members may have an interest in the securities recommended above. To unsubscribe, send a mail to unsubscribeanagram@gmail.com RATING INTERPRETATION Outperformer Expected to appreciate more than 20% over a 12-month period Accumulate Expected to appreciate up to 20% over a 12-month period Neutral Expected to remain in a narrow range Underperform Expected to depreciate more than 10% over a 12-month period Copyright in this document vests exclusively with Anagram Stock broking Limited

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