FY14E Rajasthan exit guidance maintained at 200-215,000bpd Cairn:: Centrum

FY14E Rajasthan exit guidance maintained at 200-215,000bpd
Cairn’s Rajasthan crude production in Q4 remained largely flat sequentially at 168,594bpd while revenues jumped due to higher realisations. Operating performance was weaker than our expectations due to higher exploration write offs (primarily due to a dry well in Sri Lanka). However, marginal forex losses and lower tax rate benefitted the bottom line.
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Rajasthan crude attracts lower discount in FY13: Although the management indicated crude discount of 10-15% for FY13, Rajasthan crude fetched only 10.7% discount with net realisation of US$98.3/bbl. Sequential improvement in avg. crude realisations at US$100.6/bbl against US$96.2/bbl in Q3 led to 2.0% QoQ jump in revenues at Rs43.6bn.
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Rajasthan crude production remains flattish: Cairn’s Rajasthan crude production for Q4 averaged at 168,594bpd a tad lower than 169,977bpd in Q3 (FY13 average at 169,390bpd). Bhagyam production remained stagnant at about 22-23,000bpd and is likely to rise by H2FY14E. Cairn is yet to drill 15 wells as per the FDP and has received approval for drilling additional 15-18 wells to attain plateau production rate.

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Dry well write offs hit operational performance; marginal forex losses and lower tax rate benefit bottom line: Cairn’s exploration costs during Q4 stood at Rs3.7bn primarily on account of the dry well write off in Sri Lanka (Rs2.7bn) and seismic survey in South African block (Rs0.7bn). Operating profits thus declined 11.2% QoQ at Rs28.9bn. However, lower rupee volatility led to marginal forex losses (Rs27.7mn) while lower tax rate (Q4 – 2.2% and FY13 – 2.4%) benefitted the bottom line which stood at Rs25.6bn.
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Management upbeat on exiting FY14E at 200-215,000bpd; field approvals at various stages: The management remains upbeat on the exit rate of 200-215,000bpd by end FY14E. Mangala is expected to sustain the plateau of 150,000bpd while Bhagyam production will be ramped up to a plateau of 40,000bpd in H2FY14E while the recently started Aishwariya is likely to reach a plateau of 10,000bpd in the next few months totaling 200,000bpd. The recently started exploration program (where 26th discovery was made in April 2013) may add incremental volumes to support 200-215,000bpd exit rate. Additionally, commercial gas sales have also commenced from the Rajasthan block. To tap incremental reserves, Cairn has planned a massive capex of about US$3bn over the next three years (about US$1bn/year) of which about 80% will be spent on the Rajasthan block. We have changed our crude assumptions based on the delayed ramp up at Bhagyam along with a slight change in crude realisations. Also, the tax rate assumption is changed as per management guidance. Based on our revised estimates, the DCF based price target for Cairn stands reduced at Rs375 from Rs398 earlier. We continue to maintain ‘Buy’ rating on the stock backed by attractive valuations with catalysts like rising Rajasthan output going ahead and incremental exploration success playing out over the next few quarters.


Concall highlights
 Mangala field
 Production continuing at approved plateau of 150,000bpd
 Currently producing from152 wells of FDP approved 157 wells
 OC approval received for 48 additional in-fill wells to sustain production, MC approval
pending
 Management is confident of sustaining current level of production during FY14
 Application of EOR/IOR post approvals will help maintain the plateau for the next few years
 Bhagyam field
 Current production at about 22-23,000bpd
 Out of FDP approved 81 wells, 66 wells have been drilled till date
 Has approval for drilling additional 15-18 wells (over and above FDP approved wells) to reach
the approved plateau of 40,000bpd
 Expected to reach the approved plateau of 40,000bpd in H2FY14E
 Aishwariya field
 Started production in Q4
 11 development wells have been drilled of which 2 are currently producing
 Expected to reach the approved plateau of 10,000bpd in the next few months
 The field is currently behaving as per expectations
 FY13 operational and financial highlights
 Operating cost – US$3.0/bbl (incl. transportation), guidance maintained at US$5.0/bbl (incl.
transportation)
 DDA - US$7.4/bbl, guidance maintained at US$8-10/bbl
 Tax rate – 2.0%, guidance of 5-9%
 Cash on balance sheet – US$3.0bn
 Debt free
 Gross capex in Rajasthan till FY13 – US$3.8bn
 Capex plan
 Net US$3bn capex over the next three years (US$1bn/ year)
 80% expected to be spent on Rajasthan block and the rest on other assets