Cairn India reported in-line numbers for the quarter ending December 2012, though partly boosted by forex gains, lower taxes and one-offs. Though the Street’s concerns on Cairn’s oil transportation pipeline (running from Rajasthan to West Coast) have been addressed with the management observing that the pipeline is now able to carry 200,000 bopd (barrels of oil equivalent per day), the concern over oil output at its prolific Rajasthan block remains.
Gross oil production from the Rajasthan block, though up 38% year-on-year, was flat at 1,70,000 bopd sequentially, for the December quarter. With the production ramp up at Bhagyam oil fields (a part of Rajasthan block) still a few quarters away due to complexities in the reservoirs, it could prove to be an overhang on the stock. Not surprisingly, after opening with gains, Cairn’s stock closed 2.25% lower at Rs 333 on Tuesday.
Positively, in the longer run, analysts are looking at reserve upgrades to provide fresh triggers for the stock. On this front, the government has cleared incremental exploration activities and Cairn is expecting to drill as many as 100 new wells over three years in the Rajasthan block. Thus, majority of analysts remain positive on the stock – conservative analysts have price targets of up to Rs 377 levels, while optimistic ones have Rs 400 plus target for Cairn’s stock. Bloomberg consensus target at Rs 385 indicates potential upside of 14% from current levels of Rs 336.
Q3: One-offs boost profits
With net crude oil realisations were marginally down (both year-on-year and sequentially) at $95.6 per barrel for output from the Rajasthan block, Cairn still managed to report a 38% year-on-year jump in revenues due to higher production – sequentially though sales and production were almost flat. The company’s EBIDTA margin though remained flat aided by Cairn’s low operating costs.
At the net level, forex gains of Rs 236 core were lower than Rs 300 crore in the year ago period, but in contrast to Rs 786 crore loss in the September 2012 quarter. Nevertheless, a 62% rise in other income to Rs 182 crore, lower interest costs, a 73% fall in tax outgo to Rs 32 crore and an exceptional gain of Rs 189 crore, helped profits surge 48% year-on-year and 44% sequentially. Over the long term, though, analysts expect tax rates to inch up.
Output increase in FY14
Aishwarya, Mangala, Bhagyam and Barmer Hills fields form a part of Cairn’s Rajasthan block. While output from Mangala fields continues at its peak level of 150,000 bopd, output from Bhagyam field at around 20,000 bopd has still not been ramped up to 40,000 bopd due to reservoir complexities. Bhagyam fields may take some time for ramp-up as more wells need to be drilled. Aishwarya field is likely to start producing 10,000 bopd by end-FY13. Given the management’s guidance and with Bhagyam field expected to produce 40,000 bopd only by second half of FY14, Cairn targets exiting FY14 with production at 215,000 bopd.
Reserve upgrades are crucial
Currently, more than 95% of Cairn’s stock valuations are accounted for by its Rajasthan reserves, as per analysts at HSBC. With the government allowing more exploration activities in the block, Cairn is expected to drill more wells, which will be drilled at various targeted location as well as those in the Barmer Hills which hold maximum promises. Analysts at Citi observe that management sounded extremely enthused by the government’s recent approval allowing exploration activities to be carried out in the assets under development with cost recovery assured, and plans to submit an exploration work programme shortly.
Analysts at HSBC believe significant reserves upside is likely over the next 1-2 years. Their analysis indicates that the in-place oil volume can potentially more than double from the current guidance of seven billion barrels of oil equivalent. This is on account of upsides from the top layer called Barmer formation, which is similar to shale oil and additional geological feature that are yet to be fully explored. They expect a risk adjusted reserves upside of around 40% as a result.
Alok Deshpandey at Elara Capital though believes that a strong valuation upside above Rs 360 can come only from reserves upgrade in other fields in Rajasthan and till then he expects a range bound performance between Rs 320-350 for Cairn’s stock for another two quarters.
