Management Interaction Update
Cairn
Buy
Target Price: Rs400
CMP: Rs320
Upside: 25%
We recently interacted with the management of Cairn to get their feedback on ongoing projects. The key highlights are:
m Bhagyam ramp up: Cairn’s Bhagyam field in Rajasthan block is currently producing at the rate of 22,000-23,000bpd. Cairn has drilled 64 wells till October and a total of 84 wells need to be drilled as per the current approval. However, due to the reservoir issue, drilling 81 wells may not be enough for the production of 40,000bpd. The company will have to drill more wells and is currently discussing the issue with its partner, ONGC. The company is operating with one rig and is expected to get more in 2013 to expedite drilling.
m Pipeline debottlenecking: Initial trials on drag reducing agents (DRAs) have been completed and the company is discussing the results with its partner, ONGC. Simultaneously, it is also talking with vendors as DRAs need to be imported. The management is confident of expanding the current pipeline capacity to more than 200,000bpd using the DRAs which will happen in tandem with the increase in crude oil production in Q4.
m Exploration in existing producing field: Media reports suggest that the company has received in principle approval for further exploration in the Rajasthan field. But the management has not received any formal communication from the government. However, the company has been in talks with the government for exploration in other areas in the Rajasthan field to raise production further. We believe allowing exploration in existing producing fields would be a policy decision and should be applicable to the entire industry thus benefitting all existing E&P players.
m Sri Lanka: During 2012, Cairn completed Phase I, 2 wells exploration program in Mannar basin with a capex of over US$160mn. Additionally, the company has also finished 600sq.km. 3D seismic activity under Phase II. Cairn is expected to drill one more exploration/ appraisal well by mid-2013 to assess the potential and commercial viability of the discovery.
m South Africa: Cairn acquired 60% participating interest with operatorship in Block 1 in Orange Basin with PetroSA. Post regulatory approvals the company is expected to start seismic studies in the block.
m Pipeline debottlenecking: Initial trials on drag reducing agents (DRAs) have been completed and the company is discussing the results with its partner, ONGC. Simultaneously, it is also talking with vendors as DRAs need to be imported. The management is confident of expanding the current pipeline capacity to more than 200,000bpd using the DRAs which will happen in tandem with the increase in crude oil production in Q4.
m Exploration in existing producing field: Media reports suggest that the company has received in principle approval for further exploration in the Rajasthan field. But the management has not received any formal communication from the government. However, the company has been in talks with the government for exploration in other areas in the Rajasthan field to raise production further. We believe allowing exploration in existing producing fields would be a policy decision and should be applicable to the entire industry thus benefitting all existing E&P players.
m Sri Lanka: During 2012, Cairn completed Phase I, 2 wells exploration program in Mannar basin with a capex of over US$160mn. Additionally, the company has also finished 600sq.km. 3D seismic activity under Phase II. Cairn is expected to drill one more exploration/ appraisal well by mid-2013 to assess the potential and commercial viability of the discovery.
m South Africa: Cairn acquired 60% participating interest with operatorship in Block 1 in Orange Basin with PetroSA. Post regulatory approvals the company is expected to start seismic studies in the block.
m Valuation and outlook: Q3 crude production from MBA fields is likely to be same as of Q2 at about 171,000-172,000bpd and the operating performance is expected to follow too. We believe the Bhagyam ramp up will get delayed by some more time. Aishwariya production is likely to commence by end FY13 and this will be ramped up to its approved level of 10,000bpd soon. The management remains confident on producing a significant part of 240,000bpd in 2013. We believe that even if the operating milestones get postponed to some extent the fundamental growth story still remains intact. In the medium term, the hang over due to Cairn Plc. stake sale (10% is still remaining) does persist. Based on the production guidance and change in our rupee-dollar exchange rate from Rs48/US$ to Rs50/US$ for FY14E, we have revised our estimates. We remain optimistic on Cairn’s growth prospects and maintain ‘Buy’.
Thanks & Regards,
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