Initiating Coverage
Selan Exploration
Buy
Target Price: Rs393
CMP: Rs299
Upside: 31.3%
Moving into a different orbit
Selan Exploration is set to witness a surge in crude and natural gas production from FY14E following significant investment of Rs1.0bn over the next couple of years. The company has already received environmental approvals and is awaiting GOI/ DGH approvals for the development of its fields. Volume growth will be accompanied by buoyant crude oil prices which we estimate at US$110/bbl for FY14E. Selan’s return ratios are consistently high in excess of 20%. With strong volume growth, the company is likely to move into a different trajectory. We remain optimistic on both volume and earnings growth of the company and initiate coverage on the stock with a ’Buy’ and target price of Rs393.
m Government approvals to boost production: Due to delays in approvals and natural decline of the fields, crude oil production declined over the past three years. The management has indicated investments of over Rs1.0bn over the next couple of years to drill new wells and enhance production. We believe these investments would lead to an increase in crude and natural gas production.
m Low operating costs: Operating expenses for Selan’s fields is lower at about US$5.0/bbl. It went up during past few years due to higher emphasis on enhanced oil recovery (EOR). We believe operating expenses will remain at about US$5.0/bbl in the medium term.
m Healthy operating performance and return ratios: Devoid of any significant jump in operating expenses, we believe operating margins will maintain a healthy trajectory of about 80%. Selan’s return ratios (RoE, RoCE) have remained healthy in excess of 20% and we expect it to maintain its ratios at similar levels despite higher capex over the next couple of years.
m Concerns: Delay in approvals/ execution, rupee appreciation
m Growth on the cards, initiate with a ‘Buy’: Selan’s return ratios are consistently high in excess of 20%. We believe strong production growth both in crude and natural gas will culminate in healthy earnings growth for the company. We have valued Selan at its 5-year average P/E of 11x (multiple depressed due to production decline and is expected to expand while crude production ramps up) due to strong volume growth and healthy return ratios. The stock is available at 9.5x and 7.5x FY14E and FY15E EPS of Rs31.4 and Rs40.0 respectively. We recommend ‘Buy’ with a target price of Rs393 (Based on 11x SeptFY14E EPS).
m Low operating costs: Operating expenses for Selan’s fields is lower at about US$5.0/bbl. It went up during past few years due to higher emphasis on enhanced oil recovery (EOR). We believe operating expenses will remain at about US$5.0/bbl in the medium term.
m Healthy operating performance and return ratios: Devoid of any significant jump in operating expenses, we believe operating margins will maintain a healthy trajectory of about 80%. Selan’s return ratios (RoE, RoCE) have remained healthy in excess of 20% and we expect it to maintain its ratios at similar levels despite higher capex over the next couple of years.
m Concerns: Delay in approvals/ execution, rupee appreciation
m Growth on the cards, initiate with a ‘Buy’: Selan’s return ratios are consistently high in excess of 20%. We believe strong production growth both in crude and natural gas will culminate in healthy earnings growth for the company. We have valued Selan at its 5-year average P/E of 11x (multiple depressed due to production decline and is expected to expand while crude production ramps up) due to strong volume growth and healthy return ratios. The stock is available at 9.5x and 7.5x FY14E and FY15E EPS of Rs31.4 and Rs40.0 respectively. We recommend ‘Buy’ with a target price of Rs393 (Based on 11x SeptFY14E EPS).
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