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Cairn India Ltd. (CAIL.BO) Rs272.80
Equity Research
Exploration success in Sri Lanka; likely asset diversification, Buy
News
Cairn India announced today that it has struck a gas discovery in the block
SL 2007-01-001 in the Mannar Basin in Sri Lanka. They reported that the
discovery included a gross 25m length of hydrocarbon at a water depth of
1354m, thus proving the existence of a petroleum system in offshore Sri
Lanka. While we await further details, Cairn India has said that further
drilling (two more wells to be drilled by March 2012) is needed to establish
commerciality of the discovery. The company has also noted that this block
is predominantly gas-bearing with potential for some oil.
Analysis
This marks Cairn India’s first exploration success in a frontier basin outside
Rajasthan since the listing of the company and could lead to a potential
diversification of the asset base, in our view. We believe that with some
minor approvals and just a few procedural matters left in the Cairn-Vedanta
deal, the operational updates from the producing blocks will likely turn
positive going forward. Moreover, we expect further exploration updates
from both Sri Lanka and Rajasthan in coming quarters.
We forecast growth of Cairn’s production volumes by 2X between FY11-
FY14E and estimate Rajasthan gross oil volumes to reach 175 Kb/d by
Mar’12 and a peak of 215 K b/d by Dec’12 from the current 125Kb/d—one of
the best growth profiles among the emerging market “oily” stocks.
Implications
We reiterate our Buy rating with a 12-m NAV-based TP of Rs360,
suggesting upside of 32%. The key upside trigger for the stock, over the
medium term, could come from moving to a going concern valuation from
the current asset-based valuation, in our view. For that, we would need
further clarity on: 1) reserve replacement, 2) diversification of asset base,
and 3) sustainability of production profile. As an ongoing concern with
peak production of 240/270/300Kb/d, we calculate Cairn India would be
worth Rs482/511/554 per share. Key risks are 1) delay in Rajasthan rampup; and 2) any adverse regulatory developments.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Ltd. (CAIL.BO) Rs272.80
Equity Research
Exploration success in Sri Lanka; likely asset diversification, Buy
News
Cairn India announced today that it has struck a gas discovery in the block
SL 2007-01-001 in the Mannar Basin in Sri Lanka. They reported that the
discovery included a gross 25m length of hydrocarbon at a water depth of
1354m, thus proving the existence of a petroleum system in offshore Sri
Lanka. While we await further details, Cairn India has said that further
drilling (two more wells to be drilled by March 2012) is needed to establish
commerciality of the discovery. The company has also noted that this block
is predominantly gas-bearing with potential for some oil.
Analysis
This marks Cairn India’s first exploration success in a frontier basin outside
Rajasthan since the listing of the company and could lead to a potential
diversification of the asset base, in our view. We believe that with some
minor approvals and just a few procedural matters left in the Cairn-Vedanta
deal, the operational updates from the producing blocks will likely turn
positive going forward. Moreover, we expect further exploration updates
from both Sri Lanka and Rajasthan in coming quarters.
We forecast growth of Cairn’s production volumes by 2X between FY11-
FY14E and estimate Rajasthan gross oil volumes to reach 175 Kb/d by
Mar’12 and a peak of 215 K b/d by Dec’12 from the current 125Kb/d—one of
the best growth profiles among the emerging market “oily” stocks.
Implications
We reiterate our Buy rating with a 12-m NAV-based TP of Rs360,
suggesting upside of 32%. The key upside trigger for the stock, over the
medium term, could come from moving to a going concern valuation from
the current asset-based valuation, in our view. For that, we would need
further clarity on: 1) reserve replacement, 2) diversification of asset base,
and 3) sustainability of production profile. As an ongoing concern with
peak production of 240/270/300Kb/d, we calculate Cairn India would be
worth Rs482/511/554 per share. Key risks are 1) delay in Rajasthan rampup; and 2) any adverse regulatory developments.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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