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Cairn India
Rajasthan could yield 300kbpd
Event
According to an industry publication, CAIR IN has indicated to the government
that its Rajasthan production can increase to 300kbpd (240kbpd claimed
earlier) and recoverable reserves to 1.65bboe (vs 0.7bboe approved),
provided policy actions and increased capex/technology are applied. Cairn
states that the consequent maximum incremental NPV to the government
could be US$22-25bn, according to the publication. The stock could react
positively to this news, and we recommend this as an exit opportunity. We
believe that the government is supporting royalty being made costrecoverable
as a precondition to Vedanta group’s potentially destabilising
takeover. We maintain UP, with a TP of Rs304.
Impact
Additional 2P resources of 265mbbls: We believe Cairn’s FDP recoverable
reserves of ~0.7bn bbls can be boosted significantly through EOR (Enhanced
Oil Recovery) as well as exploration in other areas. The publication suggests
that reserves could be as high as 1.65bn bbls (an incremental 265mbbls),
provided the Indian government provides Cairn the necessary policy and
capex approvals (Fig 2).
300kbpd peak possible vs 240kbpd stated earlier vs 175kbpd approved:
Cairn’s current production is at an approved plateau of 125kbpd; it is awaiting
approval for optimisation to allow immediately a possible increase to 150kbpd
and envisages reaching the FDP plateau of 175kbpd by the year-end. A
ramp-up to 225kbpd can be achieved through EOR operations. Cairn has
been indicating a potential of 240kbpd through production from Barmer Hill
and other (more than 100 undrilled) prospects, which has now been
purportedly increased to 300kbpd according to Infraline (see Fig 3, 5).
NPV benefit of US$45bn (2X existing) to Central + State Govt possible:
The NPV benefit that could accrue to the government could be more than
doubled (see Fig 4) through higher production over the life of the asset
through taxes and profit share. Thus, in our view, the government could end
up gaining much more (US$20-25bn) than the NPV benefit of royalty being
made cost-recoverable (~US$2.1bn, or Rs49/sh hit to Cairn India).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs304.00 based on a DCF methodology.
Catalyst: Clarity on royalty sharing and cess, and Vedanta deal
Action and recommendation
Cairn India squeezed due to government’s recently tightened stance on
disputed royalty: Vedanta has already taken an 18.5% stake in Cairn India,
of which 8.4% is through the open offer at Rs355, and a 10.1% stake sale by
Petronas at Rs331/sh; hence, we believe it is significantly committed to
acquiring Cairn. The Group of Ministers (GoM) appointed by the government's
Cabinet Committee of Economic Affairs (CCEA) recently recommended that
royalty should be cost-recoverable. Effectively, Cairn would have to bear the
hit. According to press reports, it would be difficult for the CCEA to ignore the
recommendation of the GoM, whom they appointed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India
Rajasthan could yield 300kbpd
Event
According to an industry publication, CAIR IN has indicated to the government
that its Rajasthan production can increase to 300kbpd (240kbpd claimed
earlier) and recoverable reserves to 1.65bboe (vs 0.7bboe approved),
provided policy actions and increased capex/technology are applied. Cairn
states that the consequent maximum incremental NPV to the government
could be US$22-25bn, according to the publication. The stock could react
positively to this news, and we recommend this as an exit opportunity. We
believe that the government is supporting royalty being made costrecoverable
as a precondition to Vedanta group’s potentially destabilising
takeover. We maintain UP, with a TP of Rs304.
Impact
Additional 2P resources of 265mbbls: We believe Cairn’s FDP recoverable
reserves of ~0.7bn bbls can be boosted significantly through EOR (Enhanced
Oil Recovery) as well as exploration in other areas. The publication suggests
that reserves could be as high as 1.65bn bbls (an incremental 265mbbls),
provided the Indian government provides Cairn the necessary policy and
capex approvals (Fig 2).
300kbpd peak possible vs 240kbpd stated earlier vs 175kbpd approved:
Cairn’s current production is at an approved plateau of 125kbpd; it is awaiting
approval for optimisation to allow immediately a possible increase to 150kbpd
and envisages reaching the FDP plateau of 175kbpd by the year-end. A
ramp-up to 225kbpd can be achieved through EOR operations. Cairn has
been indicating a potential of 240kbpd through production from Barmer Hill
and other (more than 100 undrilled) prospects, which has now been
purportedly increased to 300kbpd according to Infraline (see Fig 3, 5).
NPV benefit of US$45bn (2X existing) to Central + State Govt possible:
The NPV benefit that could accrue to the government could be more than
doubled (see Fig 4) through higher production over the life of the asset
through taxes and profit share. Thus, in our view, the government could end
up gaining much more (US$20-25bn) than the NPV benefit of royalty being
made cost-recoverable (~US$2.1bn, or Rs49/sh hit to Cairn India).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs304.00 based on a DCF methodology.
Catalyst: Clarity on royalty sharing and cess, and Vedanta deal
Action and recommendation
Cairn India squeezed due to government’s recently tightened stance on
disputed royalty: Vedanta has already taken an 18.5% stake in Cairn India,
of which 8.4% is through the open offer at Rs355, and a 10.1% stake sale by
Petronas at Rs331/sh; hence, we believe it is significantly committed to
acquiring Cairn. The Group of Ministers (GoM) appointed by the government's
Cabinet Committee of Economic Affairs (CCEA) recently recommended that
royalty should be cost-recoverable. Effectively, Cairn would have to bear the
hit. According to press reports, it would be difficult for the CCEA to ignore the
recommendation of the GoM, whom they appointed.
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