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Cairn India (CAIR)
Upgrade to OW: New discovery a positive trigger
CIL announced a deepwater gas discovery in its exploration
block in Sri Lanka, a first in that country. Cairn was also the
first to make discovery in Indian deepwater
Approvals for a production ramp-up in the Rajasthan block
are an overhang on the stock, but should now be accelerated
Retain target price of INR350, but upgrade stock to OW from N
Discovery is positive for sentiment. CIL has reported a gas discovery in its deepwater
block in Sri Lanka at a water depth of 1354mt. While it is too early to ascribe either a
reserve number or a monetary value to the discovery, we expect it to be sentimentally
positive for the stock. Based on the gross thickness of a 25-metre discovery in a deepwater
block, the discovery does not automatically qualify as a major discovery as of now but we
await further details as more wells are likely to be drilled. It is important to note that Cairn
was first to discover petroleum in Indian deepwater, followed by several other significant
deepwater discoveries in India by Reliance Industries. However, CIL sold 90% of its stake
in its discovered deepwater block in the KG basin in India to rationalize its portfolio and
retained only a 10% stake; the block is yet to be developed.
Approvals likely to be accelerated. With the new discovery, CIL has once again
demonstrated the strength of its E&P capability. We believe this should help accelerate
approvals from its JV partner and regulators in India. These approvals were almost
stopped once Vedanta group offered to buy the controlling stake in CIL in August 2010.
Now that the Indian government has approved the deal, we believe CIL, with the latest
discovery, can seek these approvals with more confidence. We also believe bureaucracy is
likely to take note of CIL’s latest success in accelerating these approvals.
Rajasthan block, the main value driver has significant upside. Our detailed analysis
indicates substantial reserves upside in CIL’s Rajasthan block, which is currently
producing 125,000 bopd. We believe the in-place oil volume can more than double with
consequent increase in probability-weighted reserves by c40% (refer our note of 14 July
2010 on Cairn India, Expect more in Rajasthan beyond known sands). It is important to
note that the Rajasthan block constitutes c95% of our current valuation of CIL.
We are upgrading Cairn India to Overweight from Neutral, but retain our target price
of INR350. We value Cairn India on DCF for production from known reserves and a riskweighted multiple for reserves upsides. Lower crude oil price, rupee appreciation and
slower pace of ramp up of production are key risks to our rating and estimates.
Investment view
CIL continues to demonstrate its E&P capability and, with the company’s agreement to all the
government conditions, approvals should get accelerated. With the new discovery, CIL has once again
demonstrated the strength of its E&P capability. We believe this should help in accelerating approvals
from its JV partner and regulators in India. These approvals were almost stopped once Vedanta group
offered to buy the controlling stake in CIL in August 2010. CIL then agreed to all the government
conditions of making royalty cost recoverable and withdrawal of cess case from the court. Subsequently,
government of India approved the deal. Now that the Indian government has approved the deal, we
believe CIL, with the latest discovery, can seek these approvals more confidently. We also believe
bureaucracy is likely to take note of CIL’s latest success in accelerating these approvals.
Cairn’s Rajasthan Block is likely to have further upsides. We believe the Rajasthan block constitute
c95% of Cairn India’s valuation. Our detailed analysis shows 40% potential upside in resource base in
Rajasthan over what has been guided by the management. Our analysis is based on potential c100%
upside in oil-in-place volume from an unconventional oil-bearing source, the Barmer reservoir, overlying
the main reservoir. Another reason is a set of geological features (stratigraphic traps) that are yet to be
explored. Our probability weighted estimate of the upside is equivalent to c40% of the current resource
base. As per management, the current focus is on the ongoing development of the Rajasthan asset. Once
this is achieved, management is likely to refocus on exploratory drilling in the block, which then could
help establish these upsides. These upgrades over the next 2-5 years could ensure reserve replacement for
a considerable period. We expect the Barmer formation to commence production in FY14. The upside
could ensure replacement of produced reserves for 5-10 years. For details, please refer to our note of 14
July 2010 on Cairn India, Expect more from Rajasthan beyond known sands.
Valuation
The company’s value is essentially the value of its reserves in Rajasthan, Ravva, and Cambay. We value
these reserves on a DCF basis, using a WACC of 11% and Brent oil price of USD90/bbl. We assume an 11%
discount to Brent for valuing Rajasthan crude oil and also assume payment of royalty to the government
apart from factoring in delay in production ramp up. Our DCF-based target price is INR350. Under our
research model, for Indian stocks without a volatility indicator, the Neutral band is 5ppt above and below
a local hurdle rate of 11%, or 6-16% above the share price. Our 12-month target price of INR350 implies
a potential return of 28.4%, hence we upgrade the stock to Overweight.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Upgrade to OW: New discovery a positive trigger
CIL announced a deepwater gas discovery in its exploration
block in Sri Lanka, a first in that country. Cairn was also the
first to make discovery in Indian deepwater
Approvals for a production ramp-up in the Rajasthan block
are an overhang on the stock, but should now be accelerated
Retain target price of INR350, but upgrade stock to OW from N
Discovery is positive for sentiment. CIL has reported a gas discovery in its deepwater
block in Sri Lanka at a water depth of 1354mt. While it is too early to ascribe either a
reserve number or a monetary value to the discovery, we expect it to be sentimentally
positive for the stock. Based on the gross thickness of a 25-metre discovery in a deepwater
block, the discovery does not automatically qualify as a major discovery as of now but we
await further details as more wells are likely to be drilled. It is important to note that Cairn
was first to discover petroleum in Indian deepwater, followed by several other significant
deepwater discoveries in India by Reliance Industries. However, CIL sold 90% of its stake
in its discovered deepwater block in the KG basin in India to rationalize its portfolio and
retained only a 10% stake; the block is yet to be developed.
Approvals likely to be accelerated. With the new discovery, CIL has once again
demonstrated the strength of its E&P capability. We believe this should help accelerate
approvals from its JV partner and regulators in India. These approvals were almost
stopped once Vedanta group offered to buy the controlling stake in CIL in August 2010.
Now that the Indian government has approved the deal, we believe CIL, with the latest
discovery, can seek these approvals with more confidence. We also believe bureaucracy is
likely to take note of CIL’s latest success in accelerating these approvals.
Rajasthan block, the main value driver has significant upside. Our detailed analysis
indicates substantial reserves upside in CIL’s Rajasthan block, which is currently
producing 125,000 bopd. We believe the in-place oil volume can more than double with
consequent increase in probability-weighted reserves by c40% (refer our note of 14 July
2010 on Cairn India, Expect more in Rajasthan beyond known sands). It is important to
note that the Rajasthan block constitutes c95% of our current valuation of CIL.
We are upgrading Cairn India to Overweight from Neutral, but retain our target price
of INR350. We value Cairn India on DCF for production from known reserves and a riskweighted multiple for reserves upsides. Lower crude oil price, rupee appreciation and
slower pace of ramp up of production are key risks to our rating and estimates.
Investment view
CIL continues to demonstrate its E&P capability and, with the company’s agreement to all the
government conditions, approvals should get accelerated. With the new discovery, CIL has once again
demonstrated the strength of its E&P capability. We believe this should help in accelerating approvals
from its JV partner and regulators in India. These approvals were almost stopped once Vedanta group
offered to buy the controlling stake in CIL in August 2010. CIL then agreed to all the government
conditions of making royalty cost recoverable and withdrawal of cess case from the court. Subsequently,
government of India approved the deal. Now that the Indian government has approved the deal, we
believe CIL, with the latest discovery, can seek these approvals more confidently. We also believe
bureaucracy is likely to take note of CIL’s latest success in accelerating these approvals.
Cairn’s Rajasthan Block is likely to have further upsides. We believe the Rajasthan block constitute
c95% of Cairn India’s valuation. Our detailed analysis shows 40% potential upside in resource base in
Rajasthan over what has been guided by the management. Our analysis is based on potential c100%
upside in oil-in-place volume from an unconventional oil-bearing source, the Barmer reservoir, overlying
the main reservoir. Another reason is a set of geological features (stratigraphic traps) that are yet to be
explored. Our probability weighted estimate of the upside is equivalent to c40% of the current resource
base. As per management, the current focus is on the ongoing development of the Rajasthan asset. Once
this is achieved, management is likely to refocus on exploratory drilling in the block, which then could
help establish these upsides. These upgrades over the next 2-5 years could ensure reserve replacement for
a considerable period. We expect the Barmer formation to commence production in FY14. The upside
could ensure replacement of produced reserves for 5-10 years. For details, please refer to our note of 14
July 2010 on Cairn India, Expect more from Rajasthan beyond known sands.
Valuation
The company’s value is essentially the value of its reserves in Rajasthan, Ravva, and Cambay. We value
these reserves on a DCF basis, using a WACC of 11% and Brent oil price of USD90/bbl. We assume an 11%
discount to Brent for valuing Rajasthan crude oil and also assume payment of royalty to the government
apart from factoring in delay in production ramp up. Our DCF-based target price is INR350. Under our
research model, for Indian stocks without a volatility indicator, the Neutral band is 5ppt above and below
a local hurdle rate of 11%, or 6-16% above the share price. Our 12-month target price of INR350 implies
a potential return of 28.4%, hence we upgrade the stock to Overweight.
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