Cairn India - Compelling Valuations Outweigh Disappointments; Result Update Q2FY15 :: Edelweiss, PDF link

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Cairn India’s (Cairn) Q2FY15 profit at INR2.28bn (down 16% QoQ, 33% YoY) was below our estimate. A shutdown hurt boe production by 7% YoY and USD/boe realisation dipped 4% YoY. 3-year production growth guidance of 7-10% CAGR remains intact. Continuous exploratory drilling successes and recent upstream regulatory developments are indeed noteworthy. We cut oil price forecast by 11% for FY16 and TP by 10% to INR 346 (INR386 earlier).

Oil’s un-well: Crude dips, opex rise and profit petroleum rise hurts

Cairn’s price realisation in INR terms dipped 7% YoY due to 4% fall in price in USD terms to USD91.3/boe, buffered by 2% INR depreciation. Discount over Dated Brent narrowed from 13.0% to 10.2% YoY. Gas price realisation increased sharply 30% to USD7.3/mscf as its Rajasthan field falls outside the purview of government approval on pricing. Government’s share of profit petroleum increased 100bps YoY. Rajasthan opex temporarily doubled to USD6.3/bbl as well cost increased during the 8-day shutdown period. Opex guidance remains at 3.5/bbl for existing production, USD1.5/bbl for pipeline and ~USD10 plus for incremental EOR-based production starting from Q4FY15.

Uninterrupted drilling successes, encouraging policy momentum

Cairn clocked near-100% drilling success rate as it encountered hydrocarbons in another 3 exploration wells drilled in Rajasthan during Q2FY15, taking total discoveries to 36. It is also focusing on Raag Deep gas appraisal and oil discoveries in Raageshwari, Guda, DP and NL. It expects to add significant resources by year end March 2015 and to convert 2C to 1P. Cairn is currently operating its optimal requirement of 11 drilling rigs and 7 workover rigs. The company maintained USD3bn capex guidance, a healthy production increase target of 7-10% p.a., and robust 2P reserve replacement ratio (RRR) of 150% through FY17. Given the recent impetus to oil sector reforms, we believe the government will consider extension of Cairn’s Rajasthan production sharing contract beyond 2020 as well.

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