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Cess comes back to bite
The government move to hike the rate of crude cess by 80% impairs Cairn’s EPS
and NAV by 7-8%. In addition, given that Cairn’s contract might not include a
specific cap, it is also vulnerable to future hikes. While Cairn could take legal
recourse, its leverage may be limited while its appetite to engage in another battle
with the government may be low now as it awaits a series of approvals to drive
production in Rajasthan to the 300kbpd potential. We cut EPS by 5-7% and NAV by
~10% to Rs420/sh to factor in the current hike; here we also incorporate a 20%
cess hike every three years and the recent uplift to our near term crude forecasts.
BUY; resource upgrades, clarity on cash use, inexpensive valuations are catalysts.
Cess comes back to bite again as government raises rates
India’s government has raised cess on crude production from Rs2500/tonne to
Rs4500/tonne (+80%, last changed in Mar-06). Changes have usually impacted only
ONGC and Oil India’s nomination blocks with production sharing contracts either
waiving it off (NELP) or capping it at Rs900/tonne (Ravva, PMT, CB). We understand
that Cairn’s contract with the government (under which is waived off its arbitration on
cess in Rajasthan and agreed to pay Rs2500/tonne) is not capped and could change
with government directives; this is unique making it vulnerable to future changes too.
Cairn should litigate on fiscal stability but will it have the appetite?
Cairn may indeed choose to take legal recourse by pointing to the fiscal stability clause
in the contract. Nonetheless, in our judgment, its leverage in the matter is suspect
while its appetite to engage in a potentially long-drawn legal battle with the
government may be low at this time as it awaits a series of approvals to drive output
to ~300kbpd in Rajasthan. We forecast 184kbod in FY13 rising to ~270kbpd in FY17.
Cutting EPS by 5-7%; and NAV by ~10% to factor potential periodic hikes
The cess rate hike of Rs2000/tonne is just US$5.5/bbl indicating that crude prices
remains the key earnings variable. Nonetheless, it will cut FY13-14 EPS by 8-10% and
NAV by 7%. In addition, it is now proper to model a recurring increase as well, in our
view. Factoring in a 20% hike every three years (6% Cagr in-line with expected
inflation, 10% Cagr in the current hike), we lower our EPS by 5-7% and NAV by ~10%
to Rs420/sh. These changes also factor in the recent 3% uplift to our near term crude
forecasts; our models continue to factor in US$100/bbl real Brent prices long term.
Maintain BUY on attractive valuations and up-coming near term catalysts
After Cairn’s recent 10% correction, though, there is ~20% upside even to this value
with potential for positive surprise if Cairn is able to pin down the cess to a fixed
number (as it should endeavour to). Near term production growth, resource upgrades,
production target upgrades, clarity on use of cash (dividends and reserve replacement)
and inexpensive valuations in light of its strong operational outlook are catalysts. BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cess comes back to bite
The government move to hike the rate of crude cess by 80% impairs Cairn’s EPS
and NAV by 7-8%. In addition, given that Cairn’s contract might not include a
specific cap, it is also vulnerable to future hikes. While Cairn could take legal
recourse, its leverage may be limited while its appetite to engage in another battle
with the government may be low now as it awaits a series of approvals to drive
production in Rajasthan to the 300kbpd potential. We cut EPS by 5-7% and NAV by
~10% to Rs420/sh to factor in the current hike; here we also incorporate a 20%
cess hike every three years and the recent uplift to our near term crude forecasts.
BUY; resource upgrades, clarity on cash use, inexpensive valuations are catalysts.
Cess comes back to bite again as government raises rates
India’s government has raised cess on crude production from Rs2500/tonne to
Rs4500/tonne (+80%, last changed in Mar-06). Changes have usually impacted only
ONGC and Oil India’s nomination blocks with production sharing contracts either
waiving it off (NELP) or capping it at Rs900/tonne (Ravva, PMT, CB). We understand
that Cairn’s contract with the government (under which is waived off its arbitration on
cess in Rajasthan and agreed to pay Rs2500/tonne) is not capped and could change
with government directives; this is unique making it vulnerable to future changes too.
Cairn should litigate on fiscal stability but will it have the appetite?
Cairn may indeed choose to take legal recourse by pointing to the fiscal stability clause
in the contract. Nonetheless, in our judgment, its leverage in the matter is suspect
while its appetite to engage in a potentially long-drawn legal battle with the
government may be low at this time as it awaits a series of approvals to drive output
to ~300kbpd in Rajasthan. We forecast 184kbod in FY13 rising to ~270kbpd in FY17.
Cutting EPS by 5-7%; and NAV by ~10% to factor potential periodic hikes
The cess rate hike of Rs2000/tonne is just US$5.5/bbl indicating that crude prices
remains the key earnings variable. Nonetheless, it will cut FY13-14 EPS by 8-10% and
NAV by 7%. In addition, it is now proper to model a recurring increase as well, in our
view. Factoring in a 20% hike every three years (6% Cagr in-line with expected
inflation, 10% Cagr in the current hike), we lower our EPS by 5-7% and NAV by ~10%
to Rs420/sh. These changes also factor in the recent 3% uplift to our near term crude
forecasts; our models continue to factor in US$100/bbl real Brent prices long term.
Maintain BUY on attractive valuations and up-coming near term catalysts
After Cairn’s recent 10% correction, though, there is ~20% upside even to this value
with potential for positive surprise if Cairn is able to pin down the cess to a fixed
number (as it should endeavour to). Near term production growth, resource upgrades,
production target upgrades, clarity on use of cash (dividends and reserve replacement)
and inexpensive valuations in light of its strong operational outlook are catalysts. BUY.
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