An update
“The first rule of a happy life is low expectations. If you have unrealistic expectations you’re going to be miserable your whole life. You want to have reasonable expectations and take life’s results
Thank you for an encouraging response to my first post on Selan Explorations. The idea of writing the substack was to invite constructive feedback and record my learnings and mistakes.
I noticed that after my post the stock ran up by 15-20% over the next few days. I am wary of folks who might have not read the entire post and bought at higher levels. It is especially challenging when one writes about a small cap because of its illiquidity. I want to clarify that the investment thesis in this business is not a single quarter catalyst but a rather structural one. Discerning investors can take their time to study the business as the story unfolds and watch how the new management delivers.
As a follow up I wanted to post a quick note on Selan Q1’23 results.
One might notice that the business has delivered outsized numbers for revenue growth, and delivered on operating margins. I should caution that these numbers are abnormal and the trend should not be extrapolated without additional analysis.
The Company sells oil and natural gas at the prevailing market price (+- small discount) to customers. During the last quarter due to exceptionally high prices, the company was able to enjoy good rates but that might change in the future. Hence, the estimate for oil price should be reasonable.
Source:https://www.eia.gov/outlooks/steo/marketreview/crude.php
I am not a macro forecaster and I have never tried to make projections on oil prices (I have always been wrong :) ). My general sense is that oil price will remain stable because of prolonged underinvestment by the industry (excerpt of a recent interview with Shell CEO) within this space for multiple reasons (ESG, low roe’s etc). So most of the cashflows of oil businesses are being returned to shareholders. My view is that renewables will take time to scale and will face teething issues. I ran my model at $80 and have done a few stress tests at $60 and $70 which gives me a reasonable margin of safety.
Per my estimates, there wasn’t a meaningful change in volume in Q1’23 (vs Q1’22). I did not expect volumes to ramp that quickly.
For the business to rerate I would be watching for a) increase in volumes and b) how does the management deploy excess cash. As per my back-of-the-envelope calculations, the company has 200 crores + cash on books.
As a disclosure, I have a position in the business but will wait for further disclosure/communication from the management through AGM’s/annual reports to scale up/down the position.
Disclosure: These are personal views and nothing contained here should be construed as investment advice.
Unlike Selan which owns oil fields, another small cap company in services is worth a look. Aban Offshore Ltd. engages in the provision of offshore drilling and production services to companies engaged in exploration, development, and production of oil and gas both in domestic and international markets. It also owns and operates wind turbines for generation of wind power.