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CAIRN INDIA LTD. (CIL)
PRICE: RS.337 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.355 FY13E P/E: 6.7X
Commodity play…
q We believe the key triggers for Cairn India in the immediate near future
are 1). Rising crude oil prices on account of geo-political concerns,
2). Rupee depreciation against dollar due to large current account deficit,
etc and 3). Production ramp-up approval by GOI.
q We remain bullish on Brent crude oil prices from long term perspective
on account rising crude oil supply concern from Iran & Nigeria and expected
liquidity infusion in developed markets. We expect crude oil
prices to remain at these elevated levels. Cairn India's Rajasthan crude oil
is benchmarked to Brent crude oil price with a 10-15% discount to it.
q Recently, Iran threatened to bar shipments through the Strait of Hormuz,
if sanctions were imposed on its oil exports. According to U.S Energy
Department, ~17 Mbopd (one fifth of global consumption), pass through
the Strait of Hormuz between Iran and Oman at the mouth of the Persian
Gulf. This led to higher crude oil prices.
n Further, Nigeria's government ended fuel subsidies. With this, workers vowing to
shut ports and oil operations. Nigeria is Africa's largest crude producer and is part
of 11 member OPEC group. The labour action could have the potential to significantly
slow oil output. We believe crude oil supply distribution in Nigeria will act
as fuel to fire and can push crude oil prices higher. However, we need to wait
and watch.
n From April'11 till 6th Jan'12, rupee has depreciated 18.8% from Rs.44.4/$ to
Rs.52.8/$ (Average Rs.47.3/$). We expect rupee to remain weak due to large
current account deficit, high inflation and weak global demand. Cairn India's
sales realizations are denominated in dollar terms and hence any weakness in
rupee will be positive for Cairn's earnings and valuations.
n Vedanta group is strongly focusing on execution side. The key hurdles such as
royalty and cess issue has already been taken care off. Now, the management is
focusing on ramping up the crude oil production from Rajasthan. We believe post
change in management control the process of approvals and production ramp-up
should speed up.
n In this regard, CIL has received approval from ONGC and DGH for commencement
of production from the Bhagyam oilfield. The Bhagyam oilfield is the second-
largest find of Cairn India in the prolific Rajasthan block. However, the final
approval is pending from GOI. We expect Bhagyam to commission oil production
in H1FY13E.
n According to the Company's management Mangala field, the biggest of the 18
discoveries in Rajasthan block, can produce 150 kbopd as against current output
of 125 Kbopd (20% higher). Bhagyam, the second biggest field in the Rajasthan
block, can produce 60 Kbopd as opposed to current approved peak output of 40
Kbopd (50%), while Aishwariya can contribute 25 Kbopd as compared to earlier
10 Kbopd (150%) and other fields can produce 65 Kbopd, subject to required approvals.
n Vedanta group holds 58.5% stake in the CIL and Cairn Energy Plc retains 22.1%
stake.
n Cash (Net debt) as on 30th Sep'11 was Rs.71.3 Bn (Rs.37/Share)
n We expect FY12E EPS of Rs.39.1 and FY13E EPS of Rs.50.3
n Stock is fairly valued at 5.6x EV/EBIDTA and 6.7x P/E based on FY13E earnings
estimates.
n We believe the fair value of the stock is Rs. 355/Share (earlier Rs.325/share). We
maintain Accumulate rating on Cairn India Ltd as we believe post change in
management control the process of approvals and production ramp-up should
speed up. The upward revision in target price reflects assumption of a weaker
Rupee and higher crude oil prices.
Peak Production Targets
According to the Company's management Mangala field, the biggest of the 18 discoveries
in Rajasthan block, can produce 150 kbopd as against current output of 125
Kbopd. Bhagyam, the second biggest field in the Rajasthan block, can produce 60
Kbopd as opposed to current approved peak output of 40 Kbopd, while Aishwariya
can contribute 25 Kbopd as compared to earlier 10 Kbopd and other fields can produce
65 Kbopd, subject to required approvals. We believe, if the Company gets required
approvals and could ramp-up production to higher peak production rates this
will be significantly be positive for CIL. However, we would like to wait for more
clarity before modeling the same.
Rajasthan block peak production rates
Field name Proposed peak Earlier peak %
production production Change
target target
(Kbopd) (Kbopd)
Mangala 150 125 20
Bhagyam 60 40 50
Aishwariya 25 10 150
Others 65 65 -
Total 300 240 25
Source: Company
For the proposed peak production target, the government needs to approve field development
and investment plans along with extension of the exploration over the
rest of the block.
Sri Lanka Frontier Exploration Drilling Campaign:
Cairn India (Pvt) Ltd. a wholly owned subsidiary has indicated a natural gas discovery
in CLPL Dorado - 91H/1Z well located in SL-2007-01-001 block in mannar basin. A
gross 25 metres hydrocarbon column was tested in the first well and 24 metres zone
in second well. After two significant gas finds, the third well, CLPL-Dorado North 1-
82K/1 was plugged and abandoned as a dry hole. With the third well, Cairn has it
has "successfully completed the first phase of the exploration campaign".
The phase-1 involved the acquisition, processing and interpretation of 1,753 sq km
of 3D seismic data and a three well deep water drilling programme. The company
would now enter the second phase which would involve appraisal drilling to establish
the gas finds. We remain bullish on Sri Lanka block as it is a frontier basis and
Cairn India has the best technology to deploy.
Key risk remains
n Any significant fall in the crude oil prices will impact the realization.
n Exchange fluctuation risk
n Delay in getting government approval for increasing the production from the
Rajasthan block can impact over valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAIRN INDIA LTD. (CIL)
PRICE: RS.337 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.355 FY13E P/E: 6.7X
Commodity play…
q We believe the key triggers for Cairn India in the immediate near future
are 1). Rising crude oil prices on account of geo-political concerns,
2). Rupee depreciation against dollar due to large current account deficit,
etc and 3). Production ramp-up approval by GOI.
q We remain bullish on Brent crude oil prices from long term perspective
on account rising crude oil supply concern from Iran & Nigeria and expected
liquidity infusion in developed markets. We expect crude oil
prices to remain at these elevated levels. Cairn India's Rajasthan crude oil
is benchmarked to Brent crude oil price with a 10-15% discount to it.
q Recently, Iran threatened to bar shipments through the Strait of Hormuz,
if sanctions were imposed on its oil exports. According to U.S Energy
Department, ~17 Mbopd (one fifth of global consumption), pass through
the Strait of Hormuz between Iran and Oman at the mouth of the Persian
Gulf. This led to higher crude oil prices.
n Further, Nigeria's government ended fuel subsidies. With this, workers vowing to
shut ports and oil operations. Nigeria is Africa's largest crude producer and is part
of 11 member OPEC group. The labour action could have the potential to significantly
slow oil output. We believe crude oil supply distribution in Nigeria will act
as fuel to fire and can push crude oil prices higher. However, we need to wait
and watch.
n From April'11 till 6th Jan'12, rupee has depreciated 18.8% from Rs.44.4/$ to
Rs.52.8/$ (Average Rs.47.3/$). We expect rupee to remain weak due to large
current account deficit, high inflation and weak global demand. Cairn India's
sales realizations are denominated in dollar terms and hence any weakness in
rupee will be positive for Cairn's earnings and valuations.
n Vedanta group is strongly focusing on execution side. The key hurdles such as
royalty and cess issue has already been taken care off. Now, the management is
focusing on ramping up the crude oil production from Rajasthan. We believe post
change in management control the process of approvals and production ramp-up
should speed up.
n In this regard, CIL has received approval from ONGC and DGH for commencement
of production from the Bhagyam oilfield. The Bhagyam oilfield is the second-
largest find of Cairn India in the prolific Rajasthan block. However, the final
approval is pending from GOI. We expect Bhagyam to commission oil production
in H1FY13E.
n According to the Company's management Mangala field, the biggest of the 18
discoveries in Rajasthan block, can produce 150 kbopd as against current output
of 125 Kbopd (20% higher). Bhagyam, the second biggest field in the Rajasthan
block, can produce 60 Kbopd as opposed to current approved peak output of 40
Kbopd (50%), while Aishwariya can contribute 25 Kbopd as compared to earlier
10 Kbopd (150%) and other fields can produce 65 Kbopd, subject to required approvals.
n Vedanta group holds 58.5% stake in the CIL and Cairn Energy Plc retains 22.1%
stake.
n Cash (Net debt) as on 30th Sep'11 was Rs.71.3 Bn (Rs.37/Share)
n We expect FY12E EPS of Rs.39.1 and FY13E EPS of Rs.50.3
n Stock is fairly valued at 5.6x EV/EBIDTA and 6.7x P/E based on FY13E earnings
estimates.
n We believe the fair value of the stock is Rs. 355/Share (earlier Rs.325/share). We
maintain Accumulate rating on Cairn India Ltd as we believe post change in
management control the process of approvals and production ramp-up should
speed up. The upward revision in target price reflects assumption of a weaker
Rupee and higher crude oil prices.
Peak Production Targets
According to the Company's management Mangala field, the biggest of the 18 discoveries
in Rajasthan block, can produce 150 kbopd as against current output of 125
Kbopd. Bhagyam, the second biggest field in the Rajasthan block, can produce 60
Kbopd as opposed to current approved peak output of 40 Kbopd, while Aishwariya
can contribute 25 Kbopd as compared to earlier 10 Kbopd and other fields can produce
65 Kbopd, subject to required approvals. We believe, if the Company gets required
approvals and could ramp-up production to higher peak production rates this
will be significantly be positive for CIL. However, we would like to wait for more
clarity before modeling the same.
Rajasthan block peak production rates
Field name Proposed peak Earlier peak %
production production Change
target target
(Kbopd) (Kbopd)
Mangala 150 125 20
Bhagyam 60 40 50
Aishwariya 25 10 150
Others 65 65 -
Total 300 240 25
Source: Company
For the proposed peak production target, the government needs to approve field development
and investment plans along with extension of the exploration over the
rest of the block.
Sri Lanka Frontier Exploration Drilling Campaign:
Cairn India (Pvt) Ltd. a wholly owned subsidiary has indicated a natural gas discovery
in CLPL Dorado - 91H/1Z well located in SL-2007-01-001 block in mannar basin. A
gross 25 metres hydrocarbon column was tested in the first well and 24 metres zone
in second well. After two significant gas finds, the third well, CLPL-Dorado North 1-
82K/1 was plugged and abandoned as a dry hole. With the third well, Cairn has it
has "successfully completed the first phase of the exploration campaign".
The phase-1 involved the acquisition, processing and interpretation of 1,753 sq km
of 3D seismic data and a three well deep water drilling programme. The company
would now enter the second phase which would involve appraisal drilling to establish
the gas finds. We remain bullish on Sri Lanka block as it is a frontier basis and
Cairn India has the best technology to deploy.
Key risk remains
n Any significant fall in the crude oil prices will impact the realization.
n Exchange fluctuation risk
n Delay in getting government approval for increasing the production from the
Rajasthan block can impact over valuations.
Thank you, I have just been searching for information about this subject for a while and yours is the best I have discovered till now. But, what about the conclusion? Are you sure about the supply?
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