Cairn India: Volumes will improve

The impact of lower crude oil prices was clearly visible in Cairn India’s performance for the March 2009 quarter. With average realisation down 53 per cent, consolidated revenues fell 42 per cent y-o-y. Besides, volumes were down 12 per cent because of lower output at its key Ravva oil and gas field. The depreciating rupee did provide some cushion. At the operating level, a 260 per cent rise in exploration costs (on account of drilling expenses on two wells) impacted profitability. Thus, Cairn reported a decline in operating profit by 90% in the quarter.

With its Mangala field ready to start commercial production, volumes should see a boost. But, since its pipeline infrastructure is under construction, Cairn would initially transport the produce to the Gujarat coast by road and sea. The cost of transportation is likely to be about $10 a barrel, which is likely to decline to around $2 once the pipeline becomes operational by December 2009. Meanwhile, the initial production of 30,000 barrels of crude oil per day from the Mangala fields is expected to be ramped up to 205,000 barrels in phases by December 2011.

The price negotiations for its Rajasthan crude hasn’t concluded yet, and analysts expect it to be sold at a 10-15 per cent discount over Bonny Light variety due to higher wax content. Another unresolved issue is the payment of cess on crude oil produced from Rajasthan fields. Analysts estimate that if Cairn is required to pay a cess, their estimated fair value for the stock (Rs 240) could be lowered by up to 10 per cent. With the stock trading at Rs 218, there is limited upside, unless the crude oil price surges from current levels or if there are major new discoveries.

Associate with Jitendra Kumar Gupta and Vishal Chhabria