Cairn India: Drilling profits

The upward revision in oil estimates augurs well for the company.

The news of Cairn India raising estimates of oil reserves and peak output at its Rajasthan fields has led analysts to raise their estimates of the company’s future earnings as well as its shares (by about 10 per cent to Rs 320-335). Their reaction isn’t surprising given that the estimate of oil reserves in Cairn’s Rajasthan fields has been raised to 4 billion barrels of oil equivalent from 3.7 billion. Additionally, Cairn is now expecting a peak output of 240,000 barrels per day (bpd), which represents a 37 per cent increase over the earlier projection of 175,000 bpd.

Cairn is currently producing 20,000 bpd from Train 1 (capacity of 30,000 bpd). According to the existing capital expenditure plan, its processing capacity will increase by 100,000 bpd when Train 2 and 3 start production by June quarter and, eventually, to 205,000 bpd by 2011. This can be scaled up to 240,000 bpd through de-bottlenecking and a further increase in Train 1 capacity to 50,000 bpd.

Meanwhile, the crude oil produced by Cairn is being transported by road tankers to Reliance Industries and ONGC refineries. With completion of its crude oil pipeline by June 2010, Cairn will be better placed to ramp up output to targeted levels.

The company says capacity ramp-up for both pipeline and trains is not a problem as de-bottlenecking and incremental capex will help. It also plans to introduce advanced techniques to boost oil recovery. The proposed increase in production will happen gradually over the next two years. Cairn has already invested about $4 billion and will put in another $2 billion by 2011. However, funding should not be an issue, with production from current facilities on an upward spiral, suggests Edelweiss Research.

Cairn is also planning to start drilling in the Ravva field of the Krishna-Godavari basin from October 2010, which may provide triggers going ahead.

After the announcement, the stock surged nearly 4 per cent on Tuesday and another 2 per cent on Thursday and trades at 6.5 times its 2011-12 estimated earnings per share, according to consensus analysts’ estimates.

With contributions from Puneet Wadhwa and Sunaina Vasudev