Cairn India - Higher Cost Surprise; Result Update Q3FY15 :: Edelweiss

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Cairn India’s (Cairn) Q3FY15 PAT at INR13.5bn (down 41% QoQ, 53% YoY) was 28% and 15% below our and consensus estimates respectively. The disappointment was due to 46% YoY jump in opex to USD5.7/boe, which failed to materially decline following a surge in Q2FY15. Needless to say, a 25% QoQ fall in crude price realisation had the largest earnings impact. Q4FY15 QTD Brent prices are 43% lower than Q3FY15. Cairn’s drilling successes remain commendable and management guided to an upgrade in resources by March 2015. We cut our oil price forecast 32% for FY16 and target price by 8.5% to INR 286 (INR 313 earlier).

Crude price dips, opex remains high, muted production revival

Cairn’s crude realisation fell 28% YoY and 25% QoQ to USD68.1/boe. Discount over Brent at 10.8% remained at lower end of the 10-15% guidance. Rajasthan opex had surged to USD6.3/bbl during Q2FY15 given an 8-day shutdown, but fell only 9% QoQ (rose 46% YoY) to USD5.7/boe in Q3FY15 as the company commenced EOR through polymer flood. It guided for ~USD10 opex for incremental EOR-based production starting Q4FY15. Seismic cost increased as well. Asihwariya production ramped up to 30kbopd, increasing Rajasthan production to 178,4000 bopd,  a jump of 10% YoY, but down 4% QoQ.

Appraisal successes continue, guidance towards resource upgrade

During Q3FY15, Cairn primarily achieved appraisal successes, including a 330m gross pay zone in the Barmer Hill formation and Aishwariya East-1 well flowed 100bopd of oil. The company is currently operating 5 exploratory, 4 developmental and 7 workover rigs. It expects to add significant resources by Y/e March 2015 and to convert 2C to 1P. It maintained USD3bn capex guidance and indicated that it may use the USD2.9bn net cash for opportune acquisitions. Cairn believes that it will recover its USD3bn capex even before its licence expires in 2020, in addition to the likelihood of licence extension by 10 years.

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