CMP = Rs 154
Price target: Rs 155
Key points
- Selan Exploration Technology Ltd's (SETL) efforts to develop and monitise its oil fields have resulted in a 36.7% growth in its production volumes to 100,963 barrels of oil in FY2007. Encouraged by the results, SETL's management plans to undertake the second phase of development activity and expects to show a similar growth in production volumes in FY2008.
- However, the huge expenditure on the development of its fields has not only consumed all the cash generated by the company from its operations but has also added to the overall debt on its books.
- The company has made an adhoc payment of Rs 1.6 crore to the government towards the claim for profit petroleum in its oil field at Lohar. The provision for the same has not been made in the financial results as the company has filed an arbitration case against the claim. If the company losses the arbitration case, it could result in a significant hit on its earnings.
- SETL has successfully scaled up the production volumes in FY2007, and it can potentially double the production volumes by FY2009 (assuming a favourable scenario resulting in an equally encouraging outcome of its forthcoming development efforts). However the recent steep appreciation in the share price already factors in the positives, with the stock trading at 15.3x FY2008 and 11.1x FY2009 earnings.
- There are triggers that could result in a further re-rating of the stock as the management intends to undertake appraisal and valuation of its oil fields from one of the globally reputed agencies. The idea is to induct a strategic partner that would fund the company's ambitious plans in future.
- Consequently, given the fact that the stock appears to be fully valued but has re-rating triggers, I am downgrading my call on it to hold on this stock and not to book out.
