Growth visibility boost for Cairn India

This, after the PSC of its Rajasthan Block can now be extended beyond 2020

Cairn India has got a big relief as the Production Sharing Contract (PSC) of its Rajasthan Block, which is a 70:30 partnership with ONGC, can now be extended beyond 2020. The government allowed companies to extend the PSC by increasing the profit-sharing ratio by 10 percentage point. And this should be a major worry, given the larger benefits for Cairn.

For long, the company has been taking efforts to extend the contract, since its major oil and gas producing fields are located in this block. The extension is important as it paves the way for the company to concentrate on increasing production and committing fresh capex for the Mangala, Bhagyam, Aishwarya and Raageshwari fields in the Rajasthan block. Without clarity on extension, it would have been a risk for Cairn India to commit investments, which typically run into crores of rupees given the capital intensive nature of the business. Now, with new investments, it can raise the fields' production, which has seen no major increase in the recent past. The subdued crude prices had only added to its woes. The extension of PSC thus, takes away a major overhang on the company as well as the stock, which gained 2.7 per cent to Rs 265.70 on Thursday.

Meanwhile, crude price environment has improved since hitting a low last February, and sustained cost optimisation in the past quarters has also enhance viability of new exploration and development projects.

With all this, further benefits to the company will accrue in the form of increased crude oil reserves, say analysts who see Cairn India adding 250 million barrels to its 2P (proven and probable) reserves. An increased reserve base will also result in lower depreciation costs per unit of output, which analysts see falling by half. This is likely to offset part of the 10 per cent additional profit-sharing proposed by the government for extension of the block. The extension of the PSC adds $1 billion to Cairn's stock valuation, says an analyst at a foreign brokerage, who has increased the target price to Rs 345.

On Thursday, the National Company Law Tribunal (NCLT) also approved the merger of Cairn India with Vedanta Limited. The merger gives Vedanta access to the large cash on Cairn India's books, which though is looked at with concern by analysts. For instance, Nitin Tiwari at Antique Stock Broking post December quarter results had maintained Hold rating on Cairn ascribing a discount of 50 per cent to the company's cash and cash equivalents to accommodate concerns over potential investment in unrelated business.

The good part is that the outlook for Vedanta also remains firm on the back of strong base metal prices and ongoing expansions. On the whole, while the outlook for Cairn India is improving, the movement in its stock price is likely to track that of Vedanta, given the approaching merger.