Buy Selan Exploration, says Ashish Chugh

Buy Selan Exploration, says Ashish Chugh, Investment Analyst & Author of Hidden Gems.

Chugh told CNBC-TV18, "Selan Exploration has been extremely range bound for the past two years. The stock has moved in a very narrow band. It has not fallen too much, at the same time the upside has not been substantial."

He further added, "Selan Exploration has five oil blocks in the Cambay Basin and were allotted between 1993 and 2000. The company is doing most of its production from a block called Bakrol, which is about 36 sq kilometer block. As of today, the total production is about two lakh barrels."

"The stock has been suffering mainly on account of one major issue - the company not getting approvals from Director General of Hydrocarbons for drilling new wells. In the past three years, between 2009 and 2011, the company spent about Rs 80 to Rs 90 crore in exploratory and 3D seismic studies in all its oil fields."

"While analysing Selan, I am taking two scenarios. One, is current scenario where the company is not able to do any fresh scale up in operations and the production remains stagnant at two lakh barrels. Second is an optimistic scenario where it gets approvals from Director General of Hydrocarbons and is able to ramp up production. In the first scenario, the company is making revenues of about Rs 100 crore on two lakh barrels and its profit after tax is about Rs 50 crore. Their market cap is about Rs 525 crore."

"The stock currently trades at about Rs 315. As of March 31, 2012 it had cash and cash equivalent of about Rs 125 crore, which means their enterprise value is about Rs 400 crore. If one sees the financials closely, it is amortising an amount of about Rs 15 crore on Rs 80-90 crore spent on seismic surveys. The actual cash flows is about Rs 65 crore, enterprise value of about Rs 400 crore on cash flows of about Rs 65 crore which means one is getting this company at about 6 years of cash flows."

"This is a pessimistic scenario. As of today I am not over paying for the company if I am buying the stock. In the second scenario, where the company gets approvals from Director General of Hydrocarbons then in the next two-three years it can reach a production level of about four to five lakh barrels, which can lead to a cash flow of about Rs 150 crore."

"In each of these scenarios, negatives are getting factored in the current market price of the stock. The other good thing is that this company is totally debt free. It has got very low operating cost. It has got operating margins of between 80 to 85 percent. It is a champion in buyback of its stock. In the last ten years, it has done about six buybacks and has been regularly paying dividend to the shareholders."

"The good part is that most of its fields are still virgin. There is a lot of potential in those fields. Over a longer period of time, the ramp up in the capacity can be significant from the current levels. As of today the negatives are getting factored in, in the current market price of the stock."

"We are now hearing about Cairn and Reliance also getting approvals from Director General of Hydrocarbons, it seems that it is only a matter of time and the company can also get approvals, which means that the probability of the second scenario is much higher than even before. I believe at the current price of Rs 300-325 one does not have too much to lose from these levels. This is a stock which one can just buy and forget for few years. The rise can be significant from the current levels."