With the Agarwal family tightening its grip over Cairn India, and the oil concern re-focusing on exploration, the company’s professional structure will be put to test.
This Wednesday, Cairn India’s new chairman Navin Agarwal gave his maiden speech at the company’s annual general meeting. It began with a vote of thanks to Bill Gammell, the previous chairman, and Rahul Dhir, the outgoing managing director and chief executive officer.
Agarwal had an important task at hand—to reinstate the faith of shareholders in the company, which recently changed hands. This will not be a cinch. After all, he is the brother of Anil Agarwal, chairman of the Vedanta group, which took over Cairn India from Cairn Plc. The takeover was not easy. Shareholders in the past had protested that a raw deal was given to them and even the government did its bit to stall the handing over by making it conditional to royalty and cess issues.
All that is now history, but Cairn India’s next big challenge is to figure out how to handle the significant management and business changes that are sweeping the organisation.(BACK TO THE BASICS: CAIRN INDIA REFOCUSES ON EXPLORATION)
A family affair
Agarwal replaced Gammel, chairman of Cairn Plc, and P Elango will replace Dhir from September 1 as the interim CEO. “The search for his successor (Dhir’s) is underway,” said Agarwal in his address. Elango has been with Cairn for over 15 years but is not a part of the board as yet.
So post-Dhir, Cairn India’s board will be left with no full-time director.
There will be seven non-executive directors, of which three will be the new promoter’s nominees. The board composition will obviously undergo a change once a new CEO is in place but the question making the rounds is whether the company will retain its professional structure or not.
Analysts and company dismiss any doubts about the company’s professional capabilities. “I do not think that the recent management change will have any impact on the company since they have strong processes in place,” says Bhavesh Chauhan, research analyst for oil and gas at Angel Broking. Elango, too, says the suspicion of an overhaul is incorrect. “The perception that a churn is happening post-Vedanta takeover is not correct. Cairn India continues to enjoy same level of independence and there is a support for growth from Vedanta,” he says. When Cairn India was created, it was modelled on the lines of Larsen & Toubro as a professionally run company and it intends to remain that even now, he adds.
Investor protection groups, though, are not too sure. Days before the AGM, Stakeholders Empowerment Services had advised shareholders to oppose the move to have three promoter nominees, including Anil Agarwal’s daughter Priya, as non-retiring directors. With Dhir out of the board, the number of directors stands reduced to seven, so, technically too, three of them could not have been elected so. AGM ended with the two being appointed as permanent directors, and Priya as rotational director, a move which has quickly and clearly established the role that the Agarwal family intended to play at Cairn.
Back to exploration
Another change taking place simultaneously has largely gone unnoticed, but is now evident after last week’s acquisition of an exploration block in South Africa. In what is the first deal after the Vedanta takeover, the company has acquired a 60 per cent stake in an oil and gas exploration block on the west coast of SA from state-owned PetroSA. The block contains a gas discovery found out in 1987. Cairn India will conduct seismic surveys and follow it up with initial exploration drilling.
Though the management sees this acquisition as an important step for the company’s growth beyond the Indian sub-continent, it is also part of a larger strategy, which is to resume focus on exploration.
With its Rajasthan assets as its core business, Cairn had become a project driven company. Now, having the African asset and five NELP blocks under exploration, it wants to go back to its original strength of being an oil explorer. “In 2008, we knew that in a year we will start production from Rajasthan and we thought it was good to plant some seeds of growth, as growth can come only from exploration. So, we looked at Sri Lanka and made a deepwater gas discovery. For a company with onshore operations going in deepwater and establishing a discovery is a good achievement. It was a learning experience for us,” says Elango.
Black gold in Rajasthan
In 2006, when Cairn India was listed, the focus was Rajasthan. There were risks associated in terms of infrastructure and customers. Developing a field of that size in a desert region was a challenge. There was lack of clarity on royalty, and the oil and gas business was new to the Rajasthan government. “However, one of the key strengths of the company is its single minded approach in whatever we do. So the focus was first oil from Mangala. It has been three years that we commenced production from Rajasthan and we have already produced 100 million barrels of crude oil. I don’t think there is any other field in India which has achieved this milestone in less than three years.” Once Cairn began hitting the 175,000 barrels per day milestone, the company became confident of being able to generate lots of cash. It was also the perfect opportunity to re-launch the company to sharply focus on exploration, says Elango. “We thought we should step outside the Indian subcontinent but focus on a particular region and we choose South Africa,” he adds.
The next El Dorado?
The choice of region was based purely on geological prospects and the ability of the company to leverage its strength. In regions like West Asia, a company like Cairn cannot do anything different, but in South Africa its achievement of constructing a heated pipeline became a unique selling point. Quite unlike its government-owned peer, ONGC Videsh, which is looking at partnerships across the regions, Cairn is shopping globally based on technological strengths it has built.
Cairn’s story in India can be traced to the Ravva field where it first started producing crude oil. The revenue from this field and equity-raising through an India listing in January 2007 helped it invest $2.4 billion in Barmer and an additional $1billion in pipeline. Almost 80 per cent of what Cairn generates now goes to the Union and state governments in the form of royalty to state government, cess to central government, other taxes and crude oil share to ONGC. Irrespective of where the crude oil prices go, the company feels 20 per cent will be good enough to run operations.
As an endorsement of the company’s strategy, Elango cites the example of Ravva field where it operated at $12 per barrel (in 1998-1999) and also at $120 per barrel. In Ravva, 60 per cent goes towards government’s take.
Therefore, Rajasthan assets will give it money for years to come, while it continues to look for more oil in India and overseas. “Cairn's attempt to acquire exploration asset is more of an attempt to create value through exploration - which is the key value driver for any upstream company globally,” says Niraj Mansingka, associate director (Institutional Equities-Research), Edelweiss. Somewhere, there is also a nagging reality that India is not geologically endowed with good hydrocarbon prospects.
When production at Barmer began on August 29, 2009, in the presence of Prime Minister Manmohan Singh, the sands of Thar provided a turning point both in the country’s hydrocarbon history and that of Cairn. With oil revenue from Barmer coming into its pocket, it can now expand its canvass boldly.