Cairn India: From discovery to production

While operations stabilise, cost concerns dull the cheer.

Operations at Cairn India seem to be moving to a different plane; from exploration and discovery to production. Financial year 2010 saw the company moving from development to production, especially in its Rajasthan fields. Steady crude oil realisation of around $68.2 per barrel and gas realisation of $4.2 mscmd meant the average realisation was at $60.9 per barrel equivalent.

Steady realisations and increased production pepped up revenues by 13.29 per cent to Rs 1,623 crore. Net earnings jumped 12 times to Rs 245.19 crore during the fourth quarter compared to the year-ago period. But, this was over a lower base, when the Rajasthan fields were not operational. Production has been ramped up to 60,000 barrels per day from 20,000 barrels two quarters ago.

However, there are glitches. Operational expenses at the Rajasthan assets stood at $6 per barrel, much higher than expectations and the guidance of $3.5 per barrel. Most of the waxy crude was transported by trucks, the cost of which stood at $8.3 per barrel.

Now, the critical factor for the company is completion of pipelines; the 600-km Rajasthan-Gujarat pipeline is on the verge of being commissioned. This will help Cairn ramp up production from its Mangala fields to 1,25,000 barrels per day by the third quarter of the current financial year, while offtake by Essar and IOC is likely to start soon. The approved plateau production (when production is optimised) from Mangala, Bhagyam and Aishwarya (MBA) fields in Rajasthan is 1,75,000 barrels per day, which Cairn plans to achieve next year.

With such production from MBA fields, and regular production from Ravva Basin, Cairn will be able to contribute 20 per cent to India’s total demand in 2011. The key trigger for the company’s share price will be the contested cess amount of around Rs 2,675 per million tonne. Analysts reckon that if this amount becomes applicable, the company’s earnings per share will be affected by Rs 26 per share. This may well lead to a revision of the estimates made by the Street.