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Cairn India’s 2QFY12 earnings reflect the new royalty cost recovery
regime, including the retrospective impact of royalty/adjustment to profit
petroleum on account of the change. We believe the focus will now be on
production ramp-up, dividend policy/cash use; the stock trades near our
fair value estimate, adjusted for royalty recovery. We retain a Neutral
rating.
Focus will be on production, dividends: With the royalty issue now
out of the way, focus is expected to shift back to production. Cairn has
stated that the Rajasthan asset can support a peak production rate of
240kbopd, with the Mangala field able to ramp up to 150kbopd from its
currently approved peak level of 125kbopd in short order. With ONGC's
demands now met, we expect approval for new production plans to
come through. Also, with Vedanta acquisition's large debt funding, we
expect generous dividends from Cairn India would help service parent
level debt – we build in a c.30% payout.
Can Cairn produce more? Media reports have indicated that Cairn
could ramp production up to 300kbopd – were this to also indicate a
reserve upgrade, we expect an 11% impact on NPV. At the post results
conference call, management guided at Mar-12 production at currently
approved FDP level of 175kbpd (lower-than-earlier-anticipated) but
indicated a substantial part of the 240kbpd vision would be achieved by
MBA production by 2013E, subject to approvals, infrastructure ramp up.
Rating, price target: We retain our Neutral rating on the stock. The
stock currently prices in $98/bbl LT crude, with further upside limited in
the near term, though the dividend could protect on the downside. We
adjust our price target to Rs315 to reflect the new royalty scenario. Key
upside risk to our call is a reserve upgrade/higher-than-expected
production and sustained higher crude prices, and key downside risk is a
sharp correction in crude levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India’s 2QFY12 earnings reflect the new royalty cost recovery
regime, including the retrospective impact of royalty/adjustment to profit
petroleum on account of the change. We believe the focus will now be on
production ramp-up, dividend policy/cash use; the stock trades near our
fair value estimate, adjusted for royalty recovery. We retain a Neutral
rating.
Focus will be on production, dividends: With the royalty issue now
out of the way, focus is expected to shift back to production. Cairn has
stated that the Rajasthan asset can support a peak production rate of
240kbopd, with the Mangala field able to ramp up to 150kbopd from its
currently approved peak level of 125kbopd in short order. With ONGC's
demands now met, we expect approval for new production plans to
come through. Also, with Vedanta acquisition's large debt funding, we
expect generous dividends from Cairn India would help service parent
level debt – we build in a c.30% payout.
Can Cairn produce more? Media reports have indicated that Cairn
could ramp production up to 300kbopd – were this to also indicate a
reserve upgrade, we expect an 11% impact on NPV. At the post results
conference call, management guided at Mar-12 production at currently
approved FDP level of 175kbpd (lower-than-earlier-anticipated) but
indicated a substantial part of the 240kbpd vision would be achieved by
MBA production by 2013E, subject to approvals, infrastructure ramp up.
Rating, price target: We retain our Neutral rating on the stock. The
stock currently prices in $98/bbl LT crude, with further upside limited in
the near term, though the dividend could protect on the downside. We
adjust our price target to Rs315 to reflect the new royalty scenario. Key
upside risk to our call is a reserve upgrade/higher-than-expected
production and sustained higher crude prices, and key downside risk is a
sharp correction in crude levels.
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