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UBS Investment Research
Cairn India Limited
D eal pre-conditions overshadow
�� Event: 1QFY12 results – operationally in-line
PAT was in line with UBSe but slightly above consensus. Operations are on track
but any further ramp up requires management committee/govt. approval.
�� Impact: Results neutral but deal pre-conditions will effect future earnings
The company has received the letter from MoPNG that details the preconditions
for Cairn Vedanta deal approval. Our understanding is that the main issues raised
are: 1) that royalty be made cost recoverable and 2) withdrawal of the arbitration
case for cess, effectively making Cairn pay higher cess. Cairn will now hold a
postal ballot to seek approval for these conditions from all shareholders. The votes
will be weighted by economic interest in Cairn India. Since Cairn Energy and
Vedanta are majority shareholders we expect acceptance of these conditions.
�� Action: Lower EPS estimates to incorporate effect of higher cess payment
We update our estimates to incorporate the effect of a higher cess payment; our
estimates already reflect cost recoverable royalty and a higher peak production of
210 kbopd from FY13 onwards. This lowers our FY12/FY13/FY14 EPS by
6.3%/6.6%/7.8% resp. Our PT remains unchanged as the effect of lower cess is
offset partly by the higher cash as we roll forward to FY13 and partly by lower
government take. We continue to assume oil at US$95/bbl for FY13 and beyond.
�� Valuation: SOTP based PT of Rs 385/sh
Our SOTP-based PT comprises: 1) DCF for Rajasthan producing fields 2a)
contingent reserves and exploratory upside— both valued at EV/boe; and 4) other
producing fields.
4QFY11 results
The company’s operations are on track, with Mangala producing ~125kbopd.
But further ramp up requires government and JV partner approval.
�� Mangala production is the maximum approved 125 kbopd
�� The opex for the Mangala field was US$2.5/bbl including the pipeline
charges
�� Mangala crude realisation was US$104.5/bbl for the quarter, a discount of
~10.9% to Brent
�� The company had a net cash position of US$1.025 bn at the end of the
year(US$ 1.447 bn of cash of US$ 422 mn of debt)
�� The company expects that it will be able to ramp up Bhagyam production
within two months of receiving approvals and Aishwarya (subject to
government approval) should start production in 2HCY12
�� The company’s capex spend on the Rajasthan fields for the quarter was ~
US$ 120mn and the cumulative capex on the fields has been ~US$ 3.115bn
�� 148 wells have been drilled to date at the Mangala field. Of these 94 have
been completed and 64 are producing
�� The reported tax as a percentage of PBT is only 3.2% due to lower deferred
taxes on account of lower exploration charge
Valuation
We derive our price target of Rs 385.00 from a sum-of-the-parts valuation. Cairn
derives 61% of its operational value from the Mangala, Bhagyam and
Aishwariya (MBA) fields. We estimate the MBA and other fields in Rajasthan
account for about 95% value of Cairn’s assets. Of the Rs 385/sh cash (net of
debt) contributes about Rs 77/share. We have valued the MBA fields on a DCF
basis. We have valued Cairn’s other interests in exploration prospects on an
EV/boe multiple basis. We ascribe a 14% risk weighting to these exploration
prospects and apply an EV/boe of US$8.01/boe to these reserves.
We derive 17% of Cairn’s value from smaller fields in Rajasthan. We value
these fields by applying an EV/boe of US$8.01/bbl and assign a risk weighting
of 20% to the fields.
Our valuation incorporates:
— Cost recoverable royalty
— Cess at Rs 2550/ton (vs Rs 927/ton earlier)
— Net cash of Rs 77/share
— Peak production of 210 kbopd (We believe management committee and
government approvals will come through once the company has agreed to
paying higher cess and making royalty cost recoverable)
— Long term Brent price of US$95/bbl
�� Cairn India Limited
Cairn India is a subsidiary of Cairn Energy PLC, a UK-based crude oil and
natural gas E&P company. Cairn India owns 11 oil and gas blocks that include
producing, development and exploration assets. Rajasthan block RJ-ON-90/1, in
which it has a 70% stake contributes a significant proportion of Cairn India's
total production. In August 2010, the Vedanta Group made a bid to buy
management control of Cairn India by buying Cairn Energy's stake in the
company. The Vedanta Group is waiting for government approval.
�� Statement of Risk
Oil price and regulation are the major risks to the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Cairn India Limited
D eal pre-conditions overshadow
�� Event: 1QFY12 results – operationally in-line
PAT was in line with UBSe but slightly above consensus. Operations are on track
but any further ramp up requires management committee/govt. approval.
�� Impact: Results neutral but deal pre-conditions will effect future earnings
The company has received the letter from MoPNG that details the preconditions
for Cairn Vedanta deal approval. Our understanding is that the main issues raised
are: 1) that royalty be made cost recoverable and 2) withdrawal of the arbitration
case for cess, effectively making Cairn pay higher cess. Cairn will now hold a
postal ballot to seek approval for these conditions from all shareholders. The votes
will be weighted by economic interest in Cairn India. Since Cairn Energy and
Vedanta are majority shareholders we expect acceptance of these conditions.
�� Action: Lower EPS estimates to incorporate effect of higher cess payment
We update our estimates to incorporate the effect of a higher cess payment; our
estimates already reflect cost recoverable royalty and a higher peak production of
210 kbopd from FY13 onwards. This lowers our FY12/FY13/FY14 EPS by
6.3%/6.6%/7.8% resp. Our PT remains unchanged as the effect of lower cess is
offset partly by the higher cash as we roll forward to FY13 and partly by lower
government take. We continue to assume oil at US$95/bbl for FY13 and beyond.
�� Valuation: SOTP based PT of Rs 385/sh
Our SOTP-based PT comprises: 1) DCF for Rajasthan producing fields 2a)
contingent reserves and exploratory upside— both valued at EV/boe; and 4) other
producing fields.
4QFY11 results
The company’s operations are on track, with Mangala producing ~125kbopd.
But further ramp up requires government and JV partner approval.
�� Mangala production is the maximum approved 125 kbopd
�� The opex for the Mangala field was US$2.5/bbl including the pipeline
charges
�� Mangala crude realisation was US$104.5/bbl for the quarter, a discount of
~10.9% to Brent
�� The company had a net cash position of US$1.025 bn at the end of the
year(US$ 1.447 bn of cash of US$ 422 mn of debt)
�� The company expects that it will be able to ramp up Bhagyam production
within two months of receiving approvals and Aishwarya (subject to
government approval) should start production in 2HCY12
�� The company’s capex spend on the Rajasthan fields for the quarter was ~
US$ 120mn and the cumulative capex on the fields has been ~US$ 3.115bn
�� 148 wells have been drilled to date at the Mangala field. Of these 94 have
been completed and 64 are producing
�� The reported tax as a percentage of PBT is only 3.2% due to lower deferred
taxes on account of lower exploration charge
Valuation
We derive our price target of Rs 385.00 from a sum-of-the-parts valuation. Cairn
derives 61% of its operational value from the Mangala, Bhagyam and
Aishwariya (MBA) fields. We estimate the MBA and other fields in Rajasthan
account for about 95% value of Cairn’s assets. Of the Rs 385/sh cash (net of
debt) contributes about Rs 77/share. We have valued the MBA fields on a DCF
basis. We have valued Cairn’s other interests in exploration prospects on an
EV/boe multiple basis. We ascribe a 14% risk weighting to these exploration
prospects and apply an EV/boe of US$8.01/boe to these reserves.
We derive 17% of Cairn’s value from smaller fields in Rajasthan. We value
these fields by applying an EV/boe of US$8.01/bbl and assign a risk weighting
of 20% to the fields.
Our valuation incorporates:
— Cost recoverable royalty
— Cess at Rs 2550/ton (vs Rs 927/ton earlier)
— Net cash of Rs 77/share
— Peak production of 210 kbopd (We believe management committee and
government approvals will come through once the company has agreed to
paying higher cess and making royalty cost recoverable)
— Long term Brent price of US$95/bbl
�� Cairn India Limited
Cairn India is a subsidiary of Cairn Energy PLC, a UK-based crude oil and
natural gas E&P company. Cairn India owns 11 oil and gas blocks that include
producing, development and exploration assets. Rajasthan block RJ-ON-90/1, in
which it has a 70% stake contributes a significant proportion of Cairn India's
total production. In August 2010, the Vedanta Group made a bid to buy
management control of Cairn India by buying Cairn Energy's stake in the
company. The Vedanta Group is waiting for government approval.
�� Statement of Risk
Oil price and regulation are the major risks to the company.
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