Cairn India copes with adversity

And, rather well in the circumstances, a reason why the scrip rose after the results; however, peers in the sector might not be able to manage likewise

Cairn India’s December-quarter result, which showed the company’s net profit fell 53 per cent, has offered a glimpse into what is ahead for the financials of oil & gas exploration companies, thanks to the ongoing slump in global crude oil prices.

The petroleum arm of London-listed Vedanta Resources recorded a net profit of Rs 1,350 crore, compared with Rs 2,884 crore in the corresponding quarter last year. Total income fell 30 per cent to Rs 3,504 crore.

While the financial numbers were worse than expected, multiple factors helped it offset the impact of lower realisations. These factors might not come to the rescue of other large entities in the hydrocarbon exploration sector. As a result, Cairn’s share price on BSE a day after was Rs 247.7, or 3.7 per cent higher than previous close.

Cairn India is among the lowest-cost producers of oil and gas. Its production cost was only $6 a barrel in the third quarter. “Cairn’s narrow economic moat is underpinned by the onshore Rajasthan block, its dominant revenue source, with rock-bottom operating costs of about $4 a barrel and $6 a barrel after including infill drilling process costs,” said Piyush Jain, equity analyst at Morningstar.

He said Cairn’s shares remained undervalued, even as it commanded “one of the highest net profits per barrel among Asian peers” covered by his research firm. Cairn’s capital outlay plans are on track, and he expects volume growth to pick up after a quarter or two, as the firm’s drilling and well sustenance programme starts to yield results.

The company said the dampening impact of lower crude oil realisations was cushioned by a 13 per cent jump in volumes. This, according to Kotak Securities’ Sumit Pokharna, is a major positive. “Cairn has increased production from the Rajasthan block by 10 per cent to 188,263 barrels a day, and the overall production rose by 12 per cent to 228,662 barrels a day in the third quarter, compared with the second one. Any meaningful recovery in crude oil prices will improve the earnings,” he said.

Cairn produced 20 million barrels in the third quarter; the Rajasthan block (Barmer) produced 16.6 mn of oil equivalents at an average of 180,010 barrels a day. “Realisation for the quarter was $68.3 a barrel due to a significant drop in crude oil prices globally, with an implied 10.8 per cent discount to Dated Brent. The overall operating expense in Rajasthan was $5.7 a barrel, one of the lowest in the world,” the company said.

Analysts said Cairn could gain from continuing capital expenditure that would support cash flow. It spent $247 million in the third quarter, taking capex in the first nine months of the year to $785 million. Gross cumulative capex on development in the Barmer block was $4.9 billion — $1 billion on exploration at the end of December. The firm had net cash of $2.8 billion at the end of the quarter.
CUSHION FOR CAIRN

• Cairn India, the petroleum arm of London-listed Vedanta Resources, recorded a net profit of Rs 1,350 crore, compared to Rs 2,884 crore in the corresponding quarter last year. Total income fell 30% to Rs 3,504 crore
• While the financial numbers were worse than expected, multiple factors helped it offset the impact of lower realisations
• Dampening impact of lower crude oil realisations was cushioned by the 13% jump in volumes
• Cairn India is among the lowest-cost producers of oil and gas. Its production cost was only $6 a barrel in the third quarter