Cairn India puts up a good show

Medium-term prospects remain good, but company faces challenges on the production front

Cairn India’s performance for the quarter ended March was much better than the Street’s expectations and on all accounts. Yet, given the flat production forecast for FY15, the gains for the stock may get capped.

The net sales at Rs 5,049 crore during the quarter beat the Bloomberg consensus estimates of Rs 4,986 crore. The earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 3,683 crore, too, though marginally, was higher than the Rs 3,667-crore estimate while net profit at Rs 3,035 crore was higher than the estimate of Rs 2,956 crore. The market had been expecting a robust performance and against this backdrop, the stock has also run up in April (breaking its range-trading pattern) to its 52-week high. Currently, it trades at Rs 352. Though the medium-term prospects of a fundamentally strong company having huge and growing hydrocarbon reserves remains good, Cairn India faces challenges in production, with Mangala, its largest block in Rajasthan, coming off peak output.

Average daily production from the Rajasthan block (190,881 barrels of oil equivalent per day or boepd) during the March quarter rose 13 per cent year-on-year, while overall production was up 11 per cent to 224,429 boepd. As better production volumes pushed revenues, Ebitda was driven by low operational costs of $3.9 a barrel from the Rajasthan block.

Its prospects hinge on production growth from the Rajasthan block, which would increase, but only after FY15. Oil and Natural Gas Corporation had last month  approved Cairn India's plan of raising the development cost of its Bhagyam field and, thus, with more funds at its disposal, Cairn was expected to speed the production growth from the field to 40,000 boepd from 25,000 boepd, say analysts. However, this will be offset by the downside from Mangala, which have reached a peak production of 150,000 boepd. The company expects the MBA (Mangala, Bhagyam and Aishwariya) fields’ output to remain in the 180,000 to 200,000 boepd range and, hence, production from the Barmer block holds key to growth. The company has forecast 7-10 per cent compound annual growth in production over three years from the current levels, though it expects flat production during FY15. This could be a slight surprise for the Street, which had estimated higher growth during FY15. The company had grossed average daily production of 181,530 boepd during FY14 from the Rajasthan block.

The analysts, before the announcement of results, were working on 12-14 per cent higher production from the block. For FY15 and FY16, analysts like Chirag Dhaisule at LKP Securities were factoring in an increase in production to 207,000 and 210,000 boepd, while analysts at Elara were expecting production at 205,000 and 207,000 boepd. Thus, some amount of fair value for the stock may get tweaked.

The other variables that play a crucial role in Cairn’s performance include crude oil prices and rupee-to-dollar exchange rate. The crude prices here on are not likely to see much upside. Brokerages are expecting these to remain subdued in 2014 due to higher supplies. Nitin Tiwari at Religare Capital Markets says while Brent averaged $108 a barrel in FY14, he is working his FY15 and FY16 estimates on Brent prices of $105-110. Cairn’s realisation is up to 13 per cent lower than the Brent prices. The rupee-to-dollar exchange rate is unlikely to be different from 60-61 in FY14, feel analysts.