Basant Maheshwari, our friendly neighbourhood stock wizard, has always been opposed to the idea of investing in commodity stocks. His point is that the commodities are so vulnerable to cues from the global economy and their prices are so unpredictable that it is impossible to be confident about of the prospects of these companies. Basant once mocked investors in commodity stocks by stating that if they are so confident about the trend of commodity prices, they should trade on the London Metal Exchange and rake in millions of dollars instead of eking out a living by buying commodity stocks.
However, other ace investors believe that if you can catch commodity stocks at the bottom of the cycle, you can comfortably ride the up-cycle and make a fortune from these stocks.
The difficulty arises in being able to correctly predict when the down-cycle ends and when the up-cycle begins. If you get the timing wrong, you are doomed.
Selan Exploration is a textbook example of a commodity stock. Its fortunes are directly dependant on crude oil prices. Higher crude oil prices spell more profits for Selan and vice versa.
In it’s hey days, when crude oil prices were surging, Selan attracted the attention of a number of savvy investors like Dolly Khanna, Kenneth Andrade of IDFC MF, Parag Parikh of PPFAS Mutual Fund and Ashish Chugh of Hidden Gems. Ashish Chugh was in fact responsible for drawing our attention to Selan when he made a public recommendation about it.
Porinju Veliyath has always been fascinated with Selan. In a newsletter to the investors of his PMS dated 16th February 2012, Porinju extolled the virtues of Selan in eloquent terms. He said “Any major break out of unrest in MENA could result in higher crude oil price, which is bad for India – so let us add more Selan Exploration, one of our largest holding in Portfolio. Selan is priced at Rs.500 Cr today, against its estimated Oil reserves of over Rs.70,000 Cr in 5 proven oil fields spread across 200 Sq Kms in Gujarat! This debt-free, cash rich company has initiated an aggressive drilling program and is likely to grow at CAGR 50% for next many years. I find the management honest and very professional. Whatever happens in MENA or Europe, Selan should give us fabulous return in the future.”
However, when crude prices started sliding and it became clear that a long-term bearish trend was forming, the ace investors began to slowly and steadily jettison Selan.
Dolly Khanna was, as usual, among the first to react. In June 2014, she held a treasure trove of 307,969 shares. She has been steadily paring her holding. By 01.04.2015, the holding was reduced to 182,773 shares. By 30.06.2015, Dolly’s name has disappeared from the list of major shareholders, suggesting that she has either totally got rid of the stock or reduced it to a negligible figure.
The same is true for Kenneth Andrade’s IDFC Equity Opportunities Fund. As of 01.04.2014, the Fund held 162,000 shares of Selan. This was totally sold out as of 01.04.2015.
A few other major investors like Prem Nath Anand and Yodhan Sachdev also pared their holdings.
The surprising aspect is that even Asha Mahajan, one of the promoters, dumped her holding. Her shareholding reduced from 964,146 shares as of 01.04.2014 to 636,336 as of 31.03.2015. As of 30.06.2015, Asha Mahajan’s holding stands at 581,790 shares.
Porinju has chosen to go the opposite path. He has been aggressively buying the stock in the belief that crude oil prices have bottomed out. As of 30.06.2015, Porinju’s PMS, Equity Intelligence India Pvt Ltd, holds 831,758 shares, constituting 5.07% of the total equity. The holding is worth Rs. 18.21 crore at the CMP of Rs. 219.
Now, the big cause for concern is that Goldman Sachs has made the prediction that oil prices are likely to slump to a low of $20 per barrel. Goldman Sach’s theory is that the glut in production coupled with a fall in demand means that the prices have to be headed southwards.
While a fall in crude prices is good news for the Indian economy because India is an importer of crude oil and inflation will cool down, it spells doom for oil producers like Selan Exploration.
As expected, Porinju reacted angrily. He sought to discredit Goldman Sachs by calling their earlier wrong prediction of $200 a “shameful forecast”.
Goldman Sachs predicts Crude @ $20, after the shameful forecast of $200 in 2008 at the peak around $140: http://t.co/N3a1qK56Lt
— Porinju Veliyath (@porinju) September 11, 2015
Now, the all-important question is what, if anything, we should do. As novice investors, we are obviously in no position to question the wisdom of either Goldman Sachs or of Porinju or to express any view on which way crude oil prices are headed. The best thing for us is to heed Basant’s advice and stay away from commodity stocks and instead invest only in secular growth Pharma, IT and FMCG stocks. This way, we will be able to save our skin even though we may occasionally miss out on a bonanza!
Pronju is every where,let it be taking poor qualty stocks calls,catching falling knife,taking excessive contararion calls .No doubt he seems to be brave,But there are no bravery awards in share market .Only future will tell results,but his followers will surely have a bumpy ride in between.
Lets porinju come wid a report on his hit n miss in selection of stock…I think it will sure be a poor one
Veliyath Porinju is showing a great return in his PMS Equity Intelligence, which definitely means he is periodically booking profits in many scrips and not just holding them , every one is tracking what he buys, no one is tracking what he sells, he is also quite right in not discussing about this selling aspect, only investors have to be careful. Reg Selan , he may be proven right ultimately, generally many Goldman calls have gone wrong, so we have to reserve the judgement on their USD 20 call for oil. Winners like Veliyath are always questioned, the fact is that his record is better than almost every one else. The 12 year returns on his PMS speaks for itself.
Reg Basant Maheswari , the fact is he lost credibility with Hawkins, there is absolutely no steam left in him ( pun intended )
I heard Porinju some time back on Manorama Channel, “I have been buying Selan from single digit price and sold half the holdings from 550-650; started buying again below 300”. He had recently disclosed to stock exchanges that his PMS holding crossed 5% stake in the company.
I still hold some shares which I bought at 280.
He is a penny stock gambler .. Let him do his thing and I will do mine..
It is true that we get lot of brave advice from Porinju, though we don’t know when he sell a stock. Going with this article why don’t risk takers can tuck in selan on every dip? Just a thought…..
sir i want to long term invest in  selan exploration  global off.
which is best invest in 3 year
give me advice please
No body is right in predicting the bottom of any cycle. Let us see who is the winner Goldman Sachs or Porinju
When you look at it with a third person perspective it appears logical to perceive that with alternate sources of energy coming in and with solar and wind energy going great guns somewhere along the road oil will have to compete with these energy sources and may eventually loose out because oil is limited in quantity in comparison to others…the problem still is predicting when this will happen…….
The comments by mr r. Khanna are not by me.Someone has started a blog in name of dolly khanna which is also not mine or by dolly khanna, unless the name of the person is dolly khanna.
I have great respect for mr porinju veliyath and I am sure he has his logic.Only time will tell.
I thought that I should clarify lest there is a misunderstanding
Mr Rajiv Khanna (RK) ,
Mr Porinju is doing a great service in educating investors about investing in stock markets, problem is still investors are expecting miracles in days, so start blaming him if things go wrong
No wonder great investors shy away from publicity and avoid talking about their buys & sells, also SEBI policies do not help
BTW my son is in IITM Chem, always tell him you and Mr Prem Watsa are both are a role model for him , Regards