An update on selan exploration

I had written a note about Selan exploration here . I will not repeat the analysis as the main thesis laid out earlier, still holds true.

An update

The company is cheap from multiple perspectives – enterprise value per barrel of oil reserves, EV/EBDITA etc. However due to lack of timely clearances for drilling new wells, the production and profits have stagnated for the last few years. As a result, the stock price stagnated for a few years, before the recent run from the 200 levels to around 620 now.

The company has recently started receiving approvals and has been able to re-start the drilling program. As per the latest annual report, the company has been able to drill around 10 wells and is in the process of completing the same (connect the drilled well to pipelines or other modes of transport)

In addition to the above disclosure, there is another very key variable which is showing an upward trend – development of hydrocarbon properties. This is the cost incurred by an oil and gas company to prospect for locations for new wells and then drill the well and complete it. The company has spent close to 80 Crs in the last four years in prospecting for new drilling locations.

The more interesting bit is that the company has ramped up the actual drilling and completion expenses in the current fiscal which has jumped up from 6 crs to around 55 Crs. This is a very critical variable to track as oil and Gas Companies need to drill new wells to grow production (and hence profits and cash flows).

We cannot be sure how many of these wells will be successful and when exactly they will come online. At the same time, the typical lead time from start of drilling to production of oil and gas varies between 6-9 months. So we are in effect talking of about 3-6 months of time for the oil production to ramp up.

In addition to the above, the new government seems to be focused on improving the speed of clearances and get projects moving on the ground. Considering that approvals came to standstill in the last few years, any progress on this front will help the company tremendously.

This is not a core position
This is not a big position as i think it is risky for the reasons already detailed in my earlier post. Let me repeat the key ones

-          The company has inadequate level of disclosures for an Oil and gas exploration company

-          The management provides the minimum level of commentary on the performance and outlook for the company. There are no interviews, quarterly conference calls etc. In effect short of speaking to the management directly, there are no publicly available sources of information. One is driving through a foggy windshield and being forced to make inferences based on published data

In view of the above, I have around 2% of my portfolio allocated to this idea and may add more if I think the price is getting attractive.

Please do not consider this to be a stock recommendation and do you own homework. Please read the disclaimer if you still have some doubts

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.