Exploratory upsides yet to be priced in: Cairn upgraded its estimate of
gross risked prospective resources to 530m boe from 250m boe in April
2012. However, as exploration period for the Rajasthan block expired in
2005, street has not accorded value to the exploratory upsides. As per
news reports, DGH will soon convene a Management Committee meeting
of the Block. We don`t see any reason why the extension in the
exploration period will not be granted, and thus, we expect the news flows
on exploratory upside to be positive, going ahead. It must be noted here
that under the clause b (4) of the exploration policy, if the exploration
period expires, there is a provision to carry out the work programme
further. Some examples where extensions have been granted are GSPC
Blocks, CB-ONN/2005/1 & CB/ON/2, Essar Block CB-ON/3 and HOEC Block
CB-ON/7. We ascribe a value of Rs88/share (to 530m boe at 40% discount
to ‘MBA’ implied EV/boe).
Strong business fundamentals: Strong production volumes growth (~50%
over next two years) backed up by a strong reserve base (1.7bn boe) along
with high FCF yields (~ 10% at current market price) makes Cairn India a
strong fundamental investment idea. We believe, increased capex to
increase production is likely to defer peak government profit share.
Moreover, targeted production increase to 300kbpd is likely to provide
further growth visibility over the current estimated peak output of
240kbpd, which might lead investors to value Cairn as a growing concern.
Likely announcement of the special dividend post the reorganization is
another near-term trigger for the investors.
Rupee hedge: With crude oil increasingly being treated as a financial asset,
there is a strong negative correlation between dollar index and crude oil
prices. At times of correction in crude, weakness in rupee is likely to
support earnings. We estimate crude oil prices to average at US$100/bbls
and US$105/bbls for FY13 and FY14, respectively, with OPEC playing the
balancing act in case of demand declines.
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