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Cairn India (CAIR )
Energy
The saga continues. We do not rule out further delay in the proposed Cairn-Vedanta
deal in light of 11 pre-conditions laid down by the Ministry of Petroleum and Natural
Gas. As per media reports, the conditions involve contentious issues of (1) royalty,
(2) ONGC’s pre-emption rights, (3) withdrawal of pending court cases on cess issue and
(4) continuity of technical expertise. We maintain our RS rating on the stock pending
clarity on the deal. We do not see the stock price moving in tandem with crude prices
(as has been the case historically) given the overhang of the proposed deal.
Slew of pre-conditions for Cairn-Vedanta deal
As per media reports, the Ministry of Petroleum and Natural Gas has laid down a set of 11
preconditions to give an ‘in-principle’ approval to the Cairn-Vedanta deal. Some of these
conditions include (1) withdrawal of pending lawsuits filed by Cairn India on the cess issue,
(2) acceptance of ONGC’s pre-emption right to the proposed deal, (3) inclusion of royalty as part
of the project cost, (4) no dilution of Cairn’s technical capability, (5) provision of fresh financial and
performance guarantee and (6) acceptance of government’s decision on future exploration
activities and expenditures as final and binding.
Delay in deal imminent; deal may also fall through if the government insists on these conditions
We do not rule out further delays in the fruition of the proposed deal in light of the stringent preconditions
laid down by the Ministry of Petroleum and Natural Gas. We see these pre-conditions
as further complicating the proposed transaction. We highlight that the deal has to be completed
by February 15, 2011 failing which a fresh approval will be required from shareholders of Vedanta
to extend the agreement with Cairn Energy. This could lead to even further delays in the deal.
Stock will likely be range-bound pending clarity on deal
We retain our RS rating on the stock as the stock will likely remain range-bound pending clarity on
the proposed deal. We do not see the stock as a play on crude oil prices, in any case. Cairn stock
has historically shown very high correlation to crude oil prices, particularly since it is the only
available play on crude oil prices in India currently. However, the stock has not rallied along with
crude prices recently given lack of clarity on the proposed Cairn-Vedanta deal. It also seems that
the market is finally taking cognizance of the fact that Cairn’s DCF valuation does not change
much with crude oil prices
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR )
Energy
The saga continues. We do not rule out further delay in the proposed Cairn-Vedanta
deal in light of 11 pre-conditions laid down by the Ministry of Petroleum and Natural
Gas. As per media reports, the conditions involve contentious issues of (1) royalty,
(2) ONGC’s pre-emption rights, (3) withdrawal of pending court cases on cess issue and
(4) continuity of technical expertise. We maintain our RS rating on the stock pending
clarity on the deal. We do not see the stock price moving in tandem with crude prices
(as has been the case historically) given the overhang of the proposed deal.
Slew of pre-conditions for Cairn-Vedanta deal
As per media reports, the Ministry of Petroleum and Natural Gas has laid down a set of 11
preconditions to give an ‘in-principle’ approval to the Cairn-Vedanta deal. Some of these
conditions include (1) withdrawal of pending lawsuits filed by Cairn India on the cess issue,
(2) acceptance of ONGC’s pre-emption right to the proposed deal, (3) inclusion of royalty as part
of the project cost, (4) no dilution of Cairn’s technical capability, (5) provision of fresh financial and
performance guarantee and (6) acceptance of government’s decision on future exploration
activities and expenditures as final and binding.
Delay in deal imminent; deal may also fall through if the government insists on these conditions
We do not rule out further delays in the fruition of the proposed deal in light of the stringent preconditions
laid down by the Ministry of Petroleum and Natural Gas. We see these pre-conditions
as further complicating the proposed transaction. We highlight that the deal has to be completed
by February 15, 2011 failing which a fresh approval will be required from shareholders of Vedanta
to extend the agreement with Cairn Energy. This could lead to even further delays in the deal.
Stock will likely be range-bound pending clarity on deal
We retain our RS rating on the stock as the stock will likely remain range-bound pending clarity on
the proposed deal. We do not see the stock as a play on crude oil prices, in any case. Cairn stock
has historically shown very high correlation to crude oil prices, particularly since it is the only
available play on crude oil prices in India currently. However, the stock has not rallied along with
crude prices recently given lack of clarity on the proposed Cairn-Vedanta deal. It also seems that
the market is finally taking cognizance of the fact that Cairn’s DCF valuation does not change
much with crude oil prices
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