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Cairn India
Left searching for a positive trigger
Event
Cairn India (CAIR) reported an adjusted Q2FY12 PAT of Rs15.9bn (flat YoY,
down 42% QoQ). Its reported profit of Rs7.6bn was due to the one-time hit of
royalties on account of Rajasthan production till Q1FY12 to the tune of
US$336mn, partially offset by forex gains of Rs5.3bn. Lower (recurring)
profitability was due to royalties and start of profit sharing with Government.
We maintain our TP of Rs260, and downgrade the stock from Neutral to
Underperform, as it has rallied by 11% in the last two weeks.
Impact
Vedanta takeover a done deal, but positives yet to materialise: With Cairn
India shareholders (Cairn Plc and Vedanta group hold 80%+) accepting the
value-eroding preconditions of making Rajasthan block royalty and cess costrecoverable
through a simple majority ballot (pending an NOC for sale by the
ONGC board), uncertainty surrounding the firm has been replaced with a
certainty of lower profitability, and the expectation of expedited permissions
(by GoI/ONGC) to ramp up production. Media reports state that the new
ONGC chairman has affirmed support for increasing production (25 kbpd from
Mangala possible immediately, 40kbpd from Bhagyam by end CY11).
20% tranche of profit share reduces EBITDA margin by 7% vs Q1FY12
Royalties being made cost-recoverable has hit profitability by 15% on a
recurring basis, according to the management. Also, the Barmer field has hit
the 20% tranche of profit share in Aug-11, curtailing profit margin further.
Mangala oil realizations down 2% QoQ; 10% discount to Brent
maintained: Rajasthan gross realizations fell to US$102.8/bbl. Rajasthan
total opex maintained at US$2.5/bb), which is still significantly below the
company’s long-term steady-state estimate of US$5/bbl.
Pipeline capacity may be a near-term constraint, despite permissions:
The delivery pipeline (Mangala-Salaya-Bhogat) needs to be augmented
beyond its existing capacity of 175 kbpd to allow for Mangala and Bhagyam
fields to produce at full throttle, and the same is expected to materialise not
before CY12-end, although there may be some capacity optimization.
Earnings and target price revision
PAT estimates increased by 1-2% due to INR depreciation.
Price catalyst
12-month price target: Rs260.00 based on a Sum of Parts methodology.
Catalyst: GoI permissions for ramp-up; Clarity on pipeline augmentation
Action and recommendation
CAIR is trading at an expensive US$48/bbl of EV/1P reserves (due to low 1P)
vs global mean of US$18/bbl. Approvals of ramp-up from Mangala/FDP
changes for commissioning of Bhagyam and Aishwarya could be soon, but
the stock is already reflecting the possible volume growth as well as a high
long-term Brent crude price of ~US$100/bbl, in our view. A drop in profitability
due to royalty and profit petroleum (sharing with the govt) could take the
sheen of the stock, especially if crude price declines, as is our house view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India
Left searching for a positive trigger
Event
Cairn India (CAIR) reported an adjusted Q2FY12 PAT of Rs15.9bn (flat YoY,
down 42% QoQ). Its reported profit of Rs7.6bn was due to the one-time hit of
royalties on account of Rajasthan production till Q1FY12 to the tune of
US$336mn, partially offset by forex gains of Rs5.3bn. Lower (recurring)
profitability was due to royalties and start of profit sharing with Government.
We maintain our TP of Rs260, and downgrade the stock from Neutral to
Underperform, as it has rallied by 11% in the last two weeks.
Impact
Vedanta takeover a done deal, but positives yet to materialise: With Cairn
India shareholders (Cairn Plc and Vedanta group hold 80%+) accepting the
value-eroding preconditions of making Rajasthan block royalty and cess costrecoverable
through a simple majority ballot (pending an NOC for sale by the
ONGC board), uncertainty surrounding the firm has been replaced with a
certainty of lower profitability, and the expectation of expedited permissions
(by GoI/ONGC) to ramp up production. Media reports state that the new
ONGC chairman has affirmed support for increasing production (25 kbpd from
Mangala possible immediately, 40kbpd from Bhagyam by end CY11).
20% tranche of profit share reduces EBITDA margin by 7% vs Q1FY12
Royalties being made cost-recoverable has hit profitability by 15% on a
recurring basis, according to the management. Also, the Barmer field has hit
the 20% tranche of profit share in Aug-11, curtailing profit margin further.
Mangala oil realizations down 2% QoQ; 10% discount to Brent
maintained: Rajasthan gross realizations fell to US$102.8/bbl. Rajasthan
total opex maintained at US$2.5/bb), which is still significantly below the
company’s long-term steady-state estimate of US$5/bbl.
Pipeline capacity may be a near-term constraint, despite permissions:
The delivery pipeline (Mangala-Salaya-Bhogat) needs to be augmented
beyond its existing capacity of 175 kbpd to allow for Mangala and Bhagyam
fields to produce at full throttle, and the same is expected to materialise not
before CY12-end, although there may be some capacity optimization.
Earnings and target price revision
PAT estimates increased by 1-2% due to INR depreciation.
Price catalyst
12-month price target: Rs260.00 based on a Sum of Parts methodology.
Catalyst: GoI permissions for ramp-up; Clarity on pipeline augmentation
Action and recommendation
CAIR is trading at an expensive US$48/bbl of EV/1P reserves (due to low 1P)
vs global mean of US$18/bbl. Approvals of ramp-up from Mangala/FDP
changes for commissioning of Bhagyam and Aishwarya could be soon, but
the stock is already reflecting the possible volume growth as well as a high
long-term Brent crude price of ~US$100/bbl, in our view. A drop in profitability
due to royalty and profit petroleum (sharing with the govt) could take the
sheen of the stock, especially if crude price declines, as is our house view.
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