Cairn India: Upsides capped

Limited uptick in near-term production, lower crude prices and fund allocation concerns loom

The news of Cairn India getting environmental clearance for increasing oil and gas production from the prolific Rajasthan block did provide some boost to investor sentiment, as the stock regained some lost ground from its 52-week lows. However, given the concerns over near-term production, muted crude prices and cash allocation issues, as well as lower-than-expected results, it might not move up in a hurry.

In a matter of a month-and-a-half, Cairn’s share price had fallen almost 21 per cent from its 52-week high of Rs 385 (on June 11, 2014) to 52-week low of Rs 304.25 (July 25). Even now, it trades at Rs 326, which is not far from the lows. The sensitivity of Cairn’s stock price to crude oil price is well known, as higher price bodes well for the company’s realisations. Hence, the surge in Brent prices to closing highs of $115.6 a barrel on June 19 also pushed up Cairn’s stock prices in June. However, as the geopolitical tensions eased and Brent crude started cooling, Cairn’s share price also corrected. Brent now trades at $101-103 levels.

Though crude oil price volatility played its role, the disappointing June quarter results coupled with news of Cairn giving $1.25 billion loan to the Vedanta Group for two years at an interest rate of Libor+300 basis points saw the stock slump to its 52-week low.

Even though one expected Rajasthan production to remain flat, the company’s crude oil production average of 182,000 barrels per day (bpd) came significantly lower than analysts’ expectations of 189,000 bpd and production of 200,000 bpd achieved in end March 2014 quarter.

Looking at the flattish production in FY14 and that production has not seen much upside in recent past, the news on Ministry of Environment and Forests allowing Cairn to raise crude oil production from the Rajasthan block by 50 per cent to 300,000 bpd and natural gas production to 165 million standard cubic feet per day from the Barmer basin block bodes well. However, analysts say this will only add to long-term prospects. While production in FY15 is seen flat, there could be some uptick in FY16. Production is seen averaging at 220,000 bpd in FY17, say analysts. However, with expectation of Brent crude price staying soft and possibly averaging at around $90-$100 a barrel, and also the fact that government’s profit share is rising and will reach 50 per cent in FY16, it leads to some concerns on pace of earning growth.

While Rajasthan block offers huge prospects and any positive development on new finds can be a game changer, analysts don’t seen significant upsides. They have a one-year consensus target price of Rs 371 (as per analysts polled on Bloomberg since declaration of results) for the stock. The increased concern on cash deployment nevertheless is also not good news. Analysts at Ambit Capital as many others, reiterate that the capital misallocation risks looms large on the company.