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CAIRN INDIA 2QFY11: EBITDA and PAT largely in-line, management confident of reaching 175kbpd in 2HCY11; Maintain Neutral
- Cairn India (CAIR IN, Mkt Cap US$13.3b, CMP Rs318.6, Neutral) reported 2QFY11 EBITDA at Rs21.7b (v/s est of Rs22.2b); up 16x YoY and 3x YoY. Reported PAT stood at Rs15.9b (in line with est of Rs15.2b) up 238%YoY and 463% QoQ.
- Rajasthan production averaged 116kbpd: Rajasthan gross crude oil production averaged 116kbpd (10.7mmbbl) v/s 37.1kbpd in 1QFY11 from the Mangala fields. Cairn is continuing with development drilling in Mangala fields with three drilling rigs and one completion rig. It has drilled 107 development wells of which 74 have been completed, while current production is through 48 wells. In 2QFY11, it has drilled 11 horizontal wells in Mangala of which 9 are producing.
- Rajasthan crude discounts in line at 10-15%: Rajasthan crude realization stood at US$68.6/bbl in 2QFY11 (in line with our estimate), indicating a 10% discount to average Brent price of US$76.1/bbl. Comparable realization (entitlement basis) in 1QFY11 was US$70.4/bbl.
- Crude supplies largely through pipeline: Crude sales to private refiners have been through Barmer-Salaya pipeline. The pipeline portion of 80km from Salaya to Bhogat is under construction.Train 2 and Train 3 at MPT are operational and currently producing 125kbpd crude oil.
- Production ramp-up guidance maintained: Cairn maintained its production guidance of reaching 175kbpd in 2HCY11. We model 150kbpd from Jan-11 and 175kbpd from Aug 2011, while average of 102/172kbpd in FY11/12. Cairn has entered into crude sales agreement of 143kbpd till date. Cairn has guided for production to reach 150kbpd in 4QFY11 and 175kbpd in 2HCY11 and to reach a peak of 240kbpd in 2012/13.
- Clarity on MC approval for further exploration in Rajasthan is yet to emerge: Cairn management did not provide any clarity on the media reports of Management Committee (MC) not approving exploration capex for further exploration in the block. Cairn indicated that currently it is continuing with the 2D and 3D seismic in the block.
- Key assumptions: (1) We model long term Brent crude price of US$75/bbl in our estimates and take a discount of 12.5% (~US$9/bbl) for quality and customs duty on crude at 2.5%. (2) We assume that Cairn will be required to pay cess (levy) of Rs927/MT v/s the current cess rate of Rs2,675/MT (including education tax and NCCD cess) for our DCF valuation. Higher cess payment than our estimate would impair SOTP-based target price of Cairn by Rs23/share.
- Key things to watch: Vedanta has made a bid to take controlling stake in Cairn India at Rs405/sh with a non-compete fee of Rs50/sh. The bid shall be through subject to the approval of government.
- Valuation and View: Our long term Brent price assumption is US$75/bbl. Cairn India trades at 7.7x FY12 EPS of Rs42.8. At oil price of US$80/bbl, Cairn’s FY12 EPS would be higher by 9% to Rs46.5. Our SOTP-based target price for Cairn was Rs314 at long term Brent price of US$75/bbl. At long-term Brent price of US$80/bbl, our SOTP value would increase to Rs332/share. Neutral.
Other key Highlights:
- Tax rate stood at ~8% (v/s 27% in 1QFY11) due to MAT write-back of Rs2.1b. We model FY11 and FY12 tax rate at 21%.
Exploration
- KG Onland block (KG-ONN-2003/1): Two wells were drilled in this block (Cairn India’ stake: 49%); and additional exploration and appraisal drilling is being planned.
- Pallar basin block (PR-OSN-2004/1): Geotechnical survey and pore pressure studies have been completed in the block and now Cairn is planning to drill three wells in 1HCY11 in this block.
- Sri-Lanka: Exploration drilling of 3 wells is planned in 1HCY11.
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