Selan Oil Exploration

Hi Ramesh,

Please provide me your rational on why do you think it is overpriced at 480? Also what estimates it has defied?

On second part, I have added selan in 350-490 range!!!

Regards,
-Subash

According to estimates provided by the two brokerage houses(in your note), eps targets are yet to be achieved however price targets have been crossed by a large margin.

Ohh, I see :slight_smile:

Price targets provided by brokerage houses are of not much use. These price targets are set so that, there is very very high chance of meeting them, and once it meet, than they revise the target. Crossing some analyst/brokerage estimate never implies some stock is overvalued.

The trend of continuous price target revision is of some importance if you follow some school of growth investing.

EPS target for selan is near impossible to estimate, and hence one should not take these eps estimate seriously.

Regards,

-Subash

** According margin.

**

Dolly Khanna buys another 29000 shares in Selan. Her stake has increased to 1.73% from 1.55%

Selan is up by 16% at 1.30 PMā€¦any new trigger?

The results for Q1 have been lukewarm - is anyone in the know about how the next few quarters are going to be ?

As per latest notes, ā€œnew wells in Lohar field are being put on regular production while in the Bakrol and Indora fields, the data continues to be extensively analyzed for optimal production. This process is expected to take additional time before the wells can be put on regular production.ā€

Itā€™s anyoneā€™s guess, how the next few quarters are going to be :). As oil and gas exploration is a very complex process, timeline canā€™t be attached to it. Itā€™s majorly going to be a wait game.

Disc: Iā€™ve fully divested in the recent run up. watching developments before re-entry.

Weā€™re coming close to ā€˜buy at the point of maximum pessimismā€™ I feel. But honestly I donā€™t understand commodity prices (does anyone?)

If anyone is placing contrarian bets, can you please share your thesis.

The thesis for investment in Selan was two fold. One was that it was a reasonably profitable company to begin with, and the other was the promise that there would a doubling or tripling of volumes once they start digging new wells.

I bought this company around 300 levels last November based on this thesis. Till September the volume increase has not come through (can be seen on the dghindia site). However, this could still potentially come through.

However, 65$ oil is likely to significantly dent profitability. Remember, these are marginal fields. Even though the profit petroleum component for Selan is small, it does need to spend more to get the oil out than companies in rich on shore fields. A low oil price will not augur well for the company.

Given that the oil price scenario is likely to remain bleak, at least in the short term (the next six months, say), I chose to sell 70% of my position last week at 400 levels.

Till production actually starts increasing significantly, one cannot see a great upside.

Regards

Samir

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Iā€™m specifically looking for a contrarian thesis. At what price would you get back in again? 300? 200? 100? Why? What projections of oil prices would justify getting in and what is the maximum loss that you are projecting for the company for various scenarios? Upside doesnā€™t necessarily come from more production it can come from buying when the pessimism is unduly high. At what point would you say that the price has swung to an absurd low?

As per recent corp. comm, Selan would need to raise equity and debt to fund expamsion plans if oil prices remain at this level. The beauty in Selan was ability to generate own funds. I would say that watchout for these change in characters. Contrarian bets work best when you know it is on way to turnaround. I do not think it is case yet for Selan. You can buy little higher and still make money if there are visible signs of turnaround in fundamentals.

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How about comparing Selan with Cairn India?

Cairn India seems to be significantly below book value. Ofcourse its earnings will go down due to lower pricing, and this would slightly get offset by rupee depreciation, but earnings are going to go down this quarter.

Apart from this some Analyst are not confident about the promoters. Lets keep that aside for now.

What if crude prices recover to $75+? In that case Cairnā€™s realizations should improve in last quarter of FY15.

The other scenario that Iā€™m thinking about is the global crude prices, which can go up this season if heating oil demand grows significantly due to harsh winter in western world. This would mean good news for oil producers. Overtime if OPEC is going to supply adequate quantities, what would happen to their reserves. There are reports stating that Saudiā€™s reserves will saturate by the end of the decade. Next year oil prices may stabilize above $90 - this is as per my personal opinion and Iā€™m not an oil expert.

Please share your views/comments on the above points and pros and cons of Cairn India vs. Selan Exploration

government plans to renegotiate the fiscal terms for extension of the production-sharing contract for Rajasthan block, which is majority of Cairnā€™s output.

Reports suggest the government could raise its share of oil from the block above the current 50 per cent and/or increase the stake of ONGC in the block from the existing 30 per cent. Recently, Cairn had applied for extending its licence for exploring and producing oil from this block for another 10 years and is awaiting a response on this. The contract is set to expire in 2020. If either of the two outcomes is unfavourable, it could negatively impact Cairnā€™s financials.

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Certain Interesting statistics -

  • Average Shale cost - $60 (mainly due to leverage on Shale oil producers balance sheet)

  • Average Crude cost of production for Saudi arabia (the lowest cost producer) - $20

So at current prices already Crude is cheaper the Shale

Fundamentally, Oil is cheaper then its real base levels which should be around $60 in my view due to Shale prices, its closest competitor.

It can still go down to $40 from here if Saudi doesnt Budge. But can it go below that ? Not likely, but possible, although there will be a limit as that will reverse the cycle and supply will be constrained. Nonetheless, once the storm has settled, and competiton has been killed, the OPEC will start raising prices.

My Guess is that the prices could settle between $60 to $ 80 by year end, once the supply constraints kick in.

So at this level and below existing levels, a company like Selan exploration should be good safe buy. The company has huge untapped reserves and the current price discounts a scenario that oil prices continues to be at the same low levels as present. Hence the bottom can been seen to be capped with a maximum downside of 20% from here. A good price to start accumulating.

Certain Interesting statistics -

  • Average Shale cost - $60 (mainly due to leverage on Shale oil producers balance sheet)

  • Average Crude cost of production for Saudi arabia (the lowest cost producer) - $20

So at current prices already Crude is cheaper the Shale

Fundamentally, Oil is cheaper then its real base levels which should be around $60 in my view due to Shale prices, its closest competitor.

It can still go down to $40 from here if Saudi doesnt Budge. But can it go below that ? Not likely, but possible, although there will be a limit as that will reverse the cycle and supply will be constrained. Nonetheless, once the storm has settled, and competiton has been killed, the OPEC will start raising prices.

My Guess is that the prices could settle between $60 to $ 80 by year end, once the supply constraints kick in.

So at this level and below existing levels, a company like Selan exploration should be good safe buy. The company has huge untapped reserves and the current price discounts a scenario that oil prices continues to be at the same low levels as present. Hence the bottom can been seen to be capped with a maximum downside of 20% from here. A good price to start accumulating.

Chirag any idea about the cost of production of crude for Selan.

Manish,Selanā€™s production cost is $11 per barrel. On top of this, they have to pay a $5 Royalty to the government. So effectively, $16.

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@Vikas,

Thatā€™s lower than the lowest of $20 by Saudi Arabia, the lowest cost producer, and if so remarkable at such a low scale, to say the least. How did you arrive at this fig?

@Aksh

I obtained it from the below link.

Another link. Porinju Veliyath from Equity Intelligence used to be very optimistic of this stock. He might have met the management and obtained the cost structure.

http://equity-intelligence.com/admin/knowledgecenter/doc/SelanExplorationRs300_814975687.pdf

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