Recommendation: Buy
CMP: Rs 58
Target Price: Rs 94
- Developing its oil assets: Selan Exploration Technology Ltd (SETL) aims to considerably ramp up its production through the development of its oil & gas fields. In the first phase, it has embarked on the development of ten oil producing wells in the Bakrol oil field which is estimated to increase the production by at least 500 barrel of oil per day (bpod) over the next 18-24 months.
- Consequently, its earnings are estimated to grow at a CAGR of 39% over FY2006-09E. The first batch of the two additional wells is likely to come on stream by Q2FY2007.
- Relatively de-risked business model: Unlike its peers, SETL has not invested in exploratory blocks and all of its oil fields are located in the category I sedimentary basin that has a track record of proven commercial production. This means that it is not exposed to the inherent risk associated with the exploration business.
- Hike in promoter''s stake: Over the past five years, the promoters have gradually hiked their stake by 7.5% through a reduction in the equity capital from a buy-back of shares and an increase in the absolute number of shares held by them. This reflects the management''s confidence in the business.
- Attractive valuation: At an enterprise value (EV)/reserve of $0.7 per barrel of oil & oil equivalents (boe), the stock is trading at relatively much cheaper valuations as compared with the other domestic companies like Hindustan Oil Exploration Company (HOEC) and Oil and Natural Gas Corporation (ONGC).
- Globally, exploration and production (E&P) companies command a valuation in excess of $7-8 per boe of the estimated proven and probable (2P) reserve. The stock is expected to get re-rated with the commercialisation of additional wells and ramp-up in the production.
- I recommend a Buy call on the stock with a price target of Rs94 (based on EV/reserve of $1.1/boe which is at a 75% discount to the prevailing valuations of HOEC).
