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Cairn India Limited (CAIR)
OW: Production ramp-up on track
Q3FY12 results indicate operational parameters are in line
with market expectations
Management is on track to deliver steady production growth
in the Rajasthan oil field
We maintain our Overweight rating with a DCF-based target
price of INR400
Cairn reported net profit of INR22.6bn (+12.5% YoY and +196% qoq) moderately ahead
of our and consensus estimates on account of a one-time forex gain and better realization on its
crude oil. However, the company charged off a dry well in its discovered Sri Lanka block
during the quarter, which in our view indicates a mild disappointment in the exploration efforts
as the dry well followed two discovery wells in the block. Cairn is also planning to submit a
field development plan in calendar 1H 2012 for incremental production from its producing
Rajasthan block using enhanced oil recovery (EOR) techniques. The company also indicated
that its JV partner has approved the reorganisation of its various subsidiaries, a pre-requisite for
dividend distribution. However, this reorganisation requires approval from the Indian
government, as confirmed by management.
Bhagyam ramp-up on track. Cairn has begun production in the Bhagyam field of the
Rajasthan block as of mid-January and expects the Rajasthan block to deliver oil
production of c150kbpd by end-February and c175kbpd by end of fiscal 2012 (31 March)
from the current production of 125kbpd. Cairn continues to produce oil at a very low
operating cost of USD2.5/barrel in its Rajasthan block vs guidance of USD5/barrel.
However, we do anticipate that the opex will increase once EOR is implemented.
Rajasthan block, the main value driver has significant upside. We continue to maintain
that Rajasthan has significant upside and that the in-place oil volume can more than double
with a consequent increase in probability-weighted reserves by c40%. It is important to note
that the Rajasthan block constitutes c95% of our current valuation of CIL.
Valuation We value these reserves using a DCF, with a WACC of 11% and a price of
Brent of USD91/bbl. We remain Overweight with a DCF-based target price of INR400. A
company-specific downside risk that we see is non-renewal of the underlying PSC in
2020, slow ramp up of production which can lead to reduction in our target price. Generic
risks for E&P companies include a fall in the price of crude oil different from our assumed
crude price, the failure to convert upside into reserves and new discoveries.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Limited (CAIR)
OW: Production ramp-up on track
Q3FY12 results indicate operational parameters are in line
with market expectations
Management is on track to deliver steady production growth
in the Rajasthan oil field
We maintain our Overweight rating with a DCF-based target
price of INR400
Cairn reported net profit of INR22.6bn (+12.5% YoY and +196% qoq) moderately ahead
of our and consensus estimates on account of a one-time forex gain and better realization on its
crude oil. However, the company charged off a dry well in its discovered Sri Lanka block
during the quarter, which in our view indicates a mild disappointment in the exploration efforts
as the dry well followed two discovery wells in the block. Cairn is also planning to submit a
field development plan in calendar 1H 2012 for incremental production from its producing
Rajasthan block using enhanced oil recovery (EOR) techniques. The company also indicated
that its JV partner has approved the reorganisation of its various subsidiaries, a pre-requisite for
dividend distribution. However, this reorganisation requires approval from the Indian
government, as confirmed by management.
Bhagyam ramp-up on track. Cairn has begun production in the Bhagyam field of the
Rajasthan block as of mid-January and expects the Rajasthan block to deliver oil
production of c150kbpd by end-February and c175kbpd by end of fiscal 2012 (31 March)
from the current production of 125kbpd. Cairn continues to produce oil at a very low
operating cost of USD2.5/barrel in its Rajasthan block vs guidance of USD5/barrel.
However, we do anticipate that the opex will increase once EOR is implemented.
Rajasthan block, the main value driver has significant upside. We continue to maintain
that Rajasthan has significant upside and that the in-place oil volume can more than double
with a consequent increase in probability-weighted reserves by c40%. It is important to note
that the Rajasthan block constitutes c95% of our current valuation of CIL.
Valuation We value these reserves using a DCF, with a WACC of 11% and a price of
Brent of USD91/bbl. We remain Overweight with a DCF-based target price of INR400. A
company-specific downside risk that we see is non-renewal of the underlying PSC in
2020, slow ramp up of production which can lead to reduction in our target price. Generic
risks for E&P companies include a fall in the price of crude oil different from our assumed
crude price, the failure to convert upside into reserves and new discoveries.
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