Post the policy clarity on exploration in producing E&P blocks, Cairn India has recommenced exploration at its Rajasthan block after a 4-year gap. Given the proven prospectivity of the block and aggressive drilling program (100 wells in 3 years) and similar to earlier exploration period, would add to its reserve potential, the brokerage said in a research report.
On the production front, while near-term ramp-up needs to be watched, given the slow ramp-up at Bhagyam and earlier than expected decline in Mangala, the management guidance to achieve FY14 exit production of 200-215kbpd is positive.
Cairn's large cash balances (USD4.7b by end-FY15; 48% of current market cap) are at higher than optimum levels. Given that the company has no definite large acquisition plans, the management should (1) increase dividend or announce a special dividend, and/or (2) buy back shares to reward shareholders, the report said.
The stock has corrected 19% in last 3 months led by ramp-up concerns and we estimate that the current price discounts long-term Brent price of USD75/88/bbl with/without exploration upsides. The brokerage expects that ramp-up concerns to be short-term and with likely reserve accretion, the risk-reward is favorable. Following this, it has upgraded the rating on Cairn India from Neutral to Buy with a target price of Rs 370 implying an upside of 33%.
