Assam Company’s fortunes may undergo a sea change as new oil discoveries generate substantial revenues and profits this year onwards.The stock has upside potential for investors with a 12-month horizon
ASSAM COMPANY (ACL) is a tea plantation company which operates mainly in North-East India. It had an annual turnover of around Rs 150 crore in FY07 with a current market capitalisation (mcap) of Rs 1,350 crore. The company has invested in a few oil & gas blocks in the North-East. Its fortunes are set to undergo a sea change as new oil discoveries generate substantial revenues and profits this year onwards.
The company holds stakes in two highly prospective oil blocks in Assam operated by Canada-based Canoro Resources. According to estimates by independent experts, these fields together hold proven and probable (2P) reserves of around 460 million barrels of oil and around 1.3 trillion cubic feet (tcf) of natural gas. Canoro has drawn up plans to monetise these reserves in a phased manner starting ’08.
GROWTH DRIVERS:
As the support infrastructure gets ready, the production of nearly 4,190 barrels of oil equivalent per day (boepd) will commence from one field within next the three months. With this additional production, the total output will cross 4,500 boepd; ACL’s 40% share stands at 1,800 boepd.
It is expected that over one-third of the total production will be crude oil, while the rest will be natural gas. Even at an average realisation of $80 per barrel of crude oil and $2.3 per mmbtu of natural gas, this single field will generate revenues of nearly Rs 100 crore annually for the company.
Apart from the blocks shared with Canoro, ACL independently holds three small proven oil fields on a contract basis from ONGC for development, with estimated oil reserves of 30 million barrels. According to the contract, ACL will hold 35% and 70% participating interest in oil and gas, respectively.
These proven fields are on a high-speed development path with new wells being drilled at more locations. At the same time, several existing producing wells are being refurbished. This provides potential for a further upside in petroleum production for ACL. To expand its geographical reach, ACL has formed a joint venture (JV) company with Texasbased DMG Exploration. This JV, named Austin Exploration, currently holds stakes in eight exploration blocks in Australia and the US, and is eyeing four exploration blocks in Mongolia. The company has floated a special economic zone (SEZ) with Gujarat State Petroleum (GSPC), which has received inprinciple approval from the central government. This SEZ aims to provide various engineering products and services to hydrocarbon and energy industries. Out of the required 450 hectares (approx 1,110 acres), the company has already received possession of 317 hectares. It plans to invest around Rs 2,000 crore in this project over the next two years.
FINANCIALS:
The company currently depends on the tea plantation business for 95% of its revenues. It reported just 5% growth in net sales during the nine-month period ended September ’07. The net profit during the period declined by 25% on a year-on-year basis to Rs 4.8 crore. However, in future, ACL’s revenue growth will be driven by the success in its petroleum exploration and production (E&P) business.
VALUATIONS:
Considering its growth plans, ACL is expected to post a PAT of around Rs 75 crore on turnover of Rs 230 crore during CY08. On a fully diluted equity capital of Rs 36 crore, its forward EPS works out to Rs 2.1. Based on this, the scrip, which is currently trading at Rs 44.30, is commanding a forward P/E of 21.3. Considering the potential in the E&P business, we believe there is substantial upside for investors with a 12-month horizon. One of the accepted ways of valuing a petroleum E&P company is based on its proven reserves. On a conservative basis, if we value every barrel of proven oil reserve at $4, the value of ACL’s share of proven reserves comes to around Rs 2,900 crore. The valuation of the E&P business is substantially higher than its current m-cap.
RISK FACTORS:
Petroleum E&P is a long-term and capital-intensive business. Any delay in execution of the proposed development plans, or any substantial and sustained fall in international crude oil prices, will have a substantial impact on the company’s financial performance.
ASSAM COMPANY (ACL) is a tea plantation company which operates mainly in North-East India. It had an annual turnover of around Rs 150 crore in FY07 with a current market capitalisation (mcap) of Rs 1,350 crore. The company has invested in a few oil & gas blocks in the North-East. Its fortunes are set to undergo a sea change as new oil discoveries generate substantial revenues and profits this year onwards.
The company holds stakes in two highly prospective oil blocks in Assam operated by Canada-based Canoro Resources. According to estimates by independent experts, these fields together hold proven and probable (2P) reserves of around 460 million barrels of oil and around 1.3 trillion cubic feet (tcf) of natural gas. Canoro has drawn up plans to monetise these reserves in a phased manner starting ’08.
GROWTH DRIVERS:
As the support infrastructure gets ready, the production of nearly 4,190 barrels of oil equivalent per day (boepd) will commence from one field within next the three months. With this additional production, the total output will cross 4,500 boepd; ACL’s 40% share stands at 1,800 boepd.
It is expected that over one-third of the total production will be crude oil, while the rest will be natural gas. Even at an average realisation of $80 per barrel of crude oil and $2.3 per mmbtu of natural gas, this single field will generate revenues of nearly Rs 100 crore annually for the company.
Apart from the blocks shared with Canoro, ACL independently holds three small proven oil fields on a contract basis from ONGC for development, with estimated oil reserves of 30 million barrels. According to the contract, ACL will hold 35% and 70% participating interest in oil and gas, respectively.
These proven fields are on a high-speed development path with new wells being drilled at more locations. At the same time, several existing producing wells are being refurbished. This provides potential for a further upside in petroleum production for ACL. To expand its geographical reach, ACL has formed a joint venture (JV) company with Texasbased DMG Exploration. This JV, named Austin Exploration, currently holds stakes in eight exploration blocks in Australia and the US, and is eyeing four exploration blocks in Mongolia. The company has floated a special economic zone (SEZ) with Gujarat State Petroleum (GSPC), which has received inprinciple approval from the central government. This SEZ aims to provide various engineering products and services to hydrocarbon and energy industries. Out of the required 450 hectares (approx 1,110 acres), the company has already received possession of 317 hectares. It plans to invest around Rs 2,000 crore in this project over the next two years.
FINANCIALS:
The company currently depends on the tea plantation business for 95% of its revenues. It reported just 5% growth in net sales during the nine-month period ended September ’07. The net profit during the period declined by 25% on a year-on-year basis to Rs 4.8 crore. However, in future, ACL’s revenue growth will be driven by the success in its petroleum exploration and production (E&P) business.
VALUATIONS:
Considering its growth plans, ACL is expected to post a PAT of around Rs 75 crore on turnover of Rs 230 crore during CY08. On a fully diluted equity capital of Rs 36 crore, its forward EPS works out to Rs 2.1. Based on this, the scrip, which is currently trading at Rs 44.30, is commanding a forward P/E of 21.3. Considering the potential in the E&P business, we believe there is substantial upside for investors with a 12-month horizon. One of the accepted ways of valuing a petroleum E&P company is based on its proven reserves. On a conservative basis, if we value every barrel of proven oil reserve at $4, the value of ACL’s share of proven reserves comes to around Rs 2,900 crore. The valuation of the E&P business is substantially higher than its current m-cap.
RISK FACTORS:
Petroleum E&P is a long-term and capital-intensive business. Any delay in execution of the proposed development plans, or any substantial and sustained fall in international crude oil prices, will have a substantial impact on the company’s financial performance.
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