CAIRN INDIA Mangala scale-up spikes earnings :: Edelweiss

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CAIRN INDIA
Mangala scale-up spikes earnings



􀂄 Ramp up in Mangala crude production beats earnings estimates
Cairn India’s (CIL) Q2FY11 top line grew 11.0x Y-o-Y and 2.2x Q-o-Q to INR 26.9
bn, backed by ramp-up in Rajasthan production. Net hydrocarbon production
during the quarter was 94.3 kboepd, up 110% Q-o-Q, on account of production
ramp-up of Mangala crude. Higher–than-expected ramp up in production combined
with higher expected sales of 7.69 mn bbls from Rajasthan (due to lower
inventory) resulted in revenues beating our estimate. CIL reported production
costs at USD 10.7/boe and other expenses of USD 1.5/boe. Operating costs were
lower than expectations due to operating leverage kicking in with the ramp up of
production in the Rajasthan block. Consequently, EBITDAX came in at USD
54.4/boe. The company reported EBITDAX of INR 21.7 bn, up 2.4x Q-o-Q.
Exploration costs came in at USD 1.1/boe (includes write offs) while DD&A costs in
Q2FY11 were lower Q-o-Q at USD 6.9/bbl. CIL booked a higher MAT credit
entitlement of INR 2.1 bn, leading to an effective tax rate of 8.5% in Q2FY11.
Consequently, PAT came in higher than our estimate at INR 15.85 bn.
􀂄 Exploration in Rajasthan to halt for a year; no impact on production
The management has clarified that exploration and drilling activity in Rajasthan block
will only happen in FY12 as it will need to get the required approvals for exploration
from the management committee after presenting an exploration budget. However,
there will be no impact on the appraisal and development activity in the block as
they have been approved by the government earlier. Management has maintained
guidance of producing 175 kbpd from the Rajasthan block by CY11 end with
production from Mangala field expected to ramp up to its production potential of 150
kbpd, subject to government approval. With the ~590 km pipeline from Mangala
Processing Terminal to Salaya operational, all crude sales from Mangala in Q2FY11
took place via the pipeline.

􀂄 Outlook and valuations: SOTP at INR 337/share; maintain ‘HOLD’
We are positive on long-term crude prices and CIL continues to be the most levered
play on crude. While we are broadly maintaining our earnings estimates, we are
rolling forward our valuations from March 2011 to March 2012 with the SOTP fair
value revised to INR 337/share. While triggers for the stock may come from
exploratory upsides and ramp up in production in line with management’s expanded
vision of 240 kppd (we have factored in 210 kbpd), we believe the stock will remain
at the current level due to the impending open offer of INR 355/share and
uncertainty on the royalty issue. At INR 317, CIL trades at P/E of 7.6x FY12E EPS.
We maintain ‘HOLD/SO’ recommendation/rating.