The start of oil production at Mangala fields will boost revenues of Cairn India
In the last one month, Cairn India’ stock witnessed smart gains not only on the back of a rise in crude oil prices but also on the commencement of crude oil production from its Rajasthan block. Cairn gushed its first oil from the Mangala field – its biggest discovery, which along with Bhagyam and Aishwarya are capable of producing as much as 20 per cent of India’s total oil production at peak output. The oil flow assumes significance as Cairn’s June quarter performance was below par due to a volume drop from its mature assets. In the next couple of quarters, increased crude oil production would see robust growth in revenues as well as cash-flows. Nevertheless, the crude oil outlook would also have a bearing on Cairn’s financials.
The oil production from its mature fields of Cambay and Ravva is on a natural decline and was down by 7 per cent and 4 per cent, respectively in June 2009 quarter as compared to March quarter. The impact would have been more, but for the q-o-q increase in realisations (up 21 per cent) which helped Cairn to stem major revenue losses in the June quarter.
However, on a y-o-y basis, with average crude oil realisation down by 46 per cent in June quarter to around $ 51/ barrel, sales were down 49 per cent. The reported net profit (after exceptional items) was down by two-thirds y-o-y to Rs 45.4 crore, on the back of a past profit-petroleum that was due to government from Ravva. However, this is a one-time exceptional item and thus, provides solace.
Going ahead, a higher levy of cess from Rs 927 a tonne to Rs 2,575 a tonne or any imposition of land tax from the state government may affect profitability in future. Nevertheless, expect profits to double in 2009-10 from what they were at the end of 2008-09 led by higher volumes.
While Mangala’s oil production may stand at a modest 30,000 barrel per day (bpd) to begin with, the total output from Rajasthan-based fields (including Aishwariya and Bhagyam fields) is expected to jump by over seven-fold by 2011. The government has earmarked public sector refiners to lift around 2.5 million tonnes (MT) of crude oil (equivalent to 60,000 bpd) by March 2011 from Mangala fields that is expected to reach at least 125,000 bpd or 6.25 million tonnes. MRPL and IOC’s crude oil offtake would be 0.2 MT each, while HPCL’s crude off-take expected to reach 0.3 MT. Further, IOC’s off-take is expected to touch 1.5 MT by March 2011.
Regarding pricing, Rahul Dhir, MD and CEO, Cairn India says, “We are pleased to have concluded pricing negotiations with MRPL and IOC for the initial quantities of crude from Rajasthan, which currently represents a 10 to 15 per cent discount to Brent prices.” With only 2.5 MT allocated out of expected production of 6.25 MT by first half, 2010, government may allow private refiners like Reliance, Essar Oil to buy Cairn India’s Rajasthan crude in the event of public sector firms do not lift the entire output. Thus, Dhir adds, “As we ramp up production, the government will be able to nominate buyers,” further suggesting that they would not curtail production for lack of buyers. In case of no major delays in finding takers, expect the company’s revenues to rise substantially by 2011-12 on the back of increased volumes.
At Rs 259.70, the stock trades at a PE of 9 times its estimated 2010-11 earnings. While the upside appears limited (10 per cent), unresolved issues of cess and local taxes are an overhang. However, any major discoveries at its exploratory assets or a perk up in crude oil prices can prove positive.