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Cairn India (CIL) reported higher-than-expected net profit of `2,010cr for
3QFY2011, driven by better-than-expected operating profit on account of
marginally higher volumes and lower opex at Rajasthan fields. Further,
lower-than-expected interest cost and exploration expenses resulted in bottom line
coming in significantly above our estimates during the quarter. On account of fair
valuations, we maintain our Neutral view on the stock.
Mangala production drives growth: CIL reported a 525% yoy increase in
its top line to `3,096cr (`495cr) in 3QFY2011. Working interest production
during the quarter grew by 307.6% yoy, crossing the 100,000 mark, to
100,270boepd (24,599boepd) on account of production ramp up at the
Rajasthan fields. Gross production at the Mangala field stood at an average
124,861bpd in 3QFY2011 compared to 116,058bpd in 2QFY2011 and
15,430bpd in 3QFY2010. Current production from the field is hovering around
125,000bopd and is waiting for approval to ramp up to its potential of
150,000bpd. During the quarter, blended realisations registered an increase of
15.2% yoy to US $74.3/boe (US $64.5/boe). Average realisations of Mangala
crude stood at US $74.8/bbl (US $68.6/bbl in 2QFY2011) during 3QFY2011.
Outlook and valuation: We believe all the producing and developing fields of CIL
have already been priced in. Further triggers could be in the form of high
potential discoveries in the exploratory fields; however, it is too early to factor
those in. Going forward, we do not see a major spurt in crude oil price.
We remain Neutral on the stock with an SOTP-based fair value of `312.
the Mangala field stood at US $74.8/bbl, at a higher discount of around 13.5%
(10.6% in 2QFY2011) to Brent crude oil prices on account of widening spread
between the heavy and light fractions, though in line with management’s guidance
of 10–15% discount.
OPM expands by 2,293bp yoy and 394bp qoq: During 3QFY2011, total direct
operating expenses (opex) for Rajasthan crude stood at US $2.0/bbl
(US $1.9/bbl), which was lower than our expectation. Management has
maintained that opex will hover around US $3.5/bbl in the long term once
production at the Rajasthan field stabilises. Pipeline transportation costs stood at
US $0.7/bbl (US $0.5/bbl in 2QFY2011). However, the company continues to
guide for US $1.5/bbl as cost is bound to increase on account of pigging and
pipeline maintenance activity going ahead. OPM during the quarter expanded by
1,269bp yoy to 82.8% (70.1%) and exceeded our expectation due to lower direct
opex during the quarter. The increase in margin was also on account of higher
contribution of crude oil in the company’s revenue mix. Thus, EBITDA surged by
638.1% yoy to `2,563cr (`347cr) and was higher than our expectation as we had
expected higher work-over expenditure.
DD&A cost increases, exploration cost declines: DD&A expenditure increased by
857.8% yoy to `287cr (`30cr) during the quarter due to the increase in
depreciation cost on account of commissioning of the pipeline and the increase in
depletion cost on account of higher production from the Mangala field. Exploration
cost (includes costs pertaining to geological/geophysical studies, seismic studies,
other surveys and unsuccessful wells) fell by 51% to `22cr (`42cr) and `44cr in
3QFY2011 on account of fewer exploration activities undertaken, pending JV and
government approval.
Interest expenditure higher, other income declines yoy: Interest expenditure during
the quarter stood at `74cr as against `26cr in 3QFY2010 and `128cr in
2QFY2011. The increase could be attributed to capitalisation of debt related to
pipeline and newly commissioned fields. Other income declined by 65.8% yoy to
`34cr (`100cr). However, the same rose by 21.1% sequentially to `34cr (`28cr).
PAT increases 590.9%: Total tax during the quarter stood at `205cr as against
`56cr in 3QFY2010 and `148cr in 2QFY2011. Tax rate was higher on a qoq
basis at 9.2% as against 8.5% in 2QFY2011, as there was deferred tax reversal in
the previous quarter. Thus, robust top-line growth and OPM expansion aided by
lower-than-expected interest cost and exploration expenses during the quarter led
to a 590.9% yoy surge in PAT to `2,010cr (`291cr) during 3QFY2011, which was
above our expectation of `1,706cr.
Rajasthan development highlights
Till date, 125 development wells have been drilled in the Mangala field, out of
which 84 are completed – of which 55 wells are producing crude oil.
CIL has successfully drilled and completed 11 horizontal wells in the Mangala
field, and all have been put on production.
Development drilling and well-completion activities are progressing with three
drilling rigs and one completion rig operating in the Mangala development
area.
After the commissioning of Train-3 in June 2010 (leading to a processing
capacity of 1,30,000bpd), construction activities for Train-4 have commenced
(to take MPT crude processing capacity to 205,000bpd) and are on track for
delivery in 2HCY2011. The ~590km pipeline from Mangala to Salaya sold
11mn barrels of crude oil to private refiners and IOC.
Construction work on the ~80km Salaya to Bhogat section of the pipeline,
including the Bhogat terminal and marine facility, has commenced with
completion targeted for 2HCY2012.
During 15 months of operations, MPT has processed more than 27.5mnbbls
(11mnbbls in 3QFY2011 and 10.6mnbbls in 2QFY2011) crude from the
Mangala field, which has been sold to different domestic refiners such as IOC,
RIL and Essar Oil.
Management expects to reach the approved peak production of 1,75,000bpd
by the end of CY2011.
Mangala Enhanced Oil Recovery (EOR) pilot is on track; the water injection
phase of the pilot is underway.
Bhagyam development drilling has commenced; 14 wells have been drilled till
date and production is expected to commence in 2HCY2011 and achieve
approved plateau rate of 40,000bopd by the end of CY2011.
In Aishwariya field, assessment of higher production potential and design
optimisation is currently underway; the company plans to commence
production in 2HCY2012, subject to JV and government approval.
Investment arguments
Royalty issue – An overhang: CIL’s stock price is not moving in tandem with crude
oil prices on account of various regulatory constraints attached to the
Cairn-Vedanta deal, primarily being the royalty issue. ONGC, the JV partner of
CIL in Rajasthan field, has demanded the oil ministry for resolution of the royalty
issue before the materialisation of the deal. It has applied to the ministry for
considering royalty as a recoverable cost for the purpose of profit petroleum. On
fulfillment of this condition, CIL will have to bear its share of royalty burden. We
see a dip of `40/share in the valuation of CIL if royalty borne on Rajasthan fields
becomes cost-recoverable.
Producing fields priced in; exploratory upsides awaited: MBA fields seem to be
priced in the valuation as their reserve potential is known since CIL’s public issue.
However, there are various exploratory upsides untapped in Barmer hills and other
fields waiting to be developed and commercialised. Resolution of Cairn-Vedanta
issues could accelerate exploratory drillings in these fields, increasing the
probability of successful discoveries. Currently, various schemes related to
exploratory drillings and optimisation of producing fields are awaiting approvals
from the management and operating committee. Further operational visibilities in
such fields could trigger the valuations upwards.
Crude oil rally seems to be a temporary phenomenon: The Egyptian political
unrest fueled the rally in crude oil price in anticipation of disruption in supplies.
We believe it is a temporary phenomenon and do not see a major spurt in crude
oil price in the near future, considering global cues and high OPEC spare capacity.
We assume crude oil to hover in range of US $80–85/bl in the long term.
Heavy-light crude spread expected to narrow – An upside risk: The discount of
heavier crude over lighter ones is expected to narrow, as higher number of
complex refineries globally is increasing demand for tougher crude. Besides, crude
oil supply is expected to get lighter till 2012–13 due to higher incremental
production of NGLs and condensates (~3.5 mbpd), as stated in OPEC reports.
Heavier crude oil supply is also reducing, especially from Mexican Maya and many
OPEC countries. The combined effect results into reduction in spread between
heavy and light crude due to higher prices of heavier crude and lower lighter crude
prices. This can be an upside risk to our valuations since CIL sells tougher crude.
We have assumed 10% discount to lighter crude for estimating realisations for CIL.
Outlook and valuation
Earnings are expected to be even better in the coming quarters with Train-4 lined
up for production, subject to approvals from management and operating
committee. However, the stock price seems to have factored in these positives
much before due to the appropriate visibility of operational details of MBA fields.
We are concerned about the downside risks on account of resolution of the royalty
issue in favour of ONGC. We see a dip of `40/share in the valuation if royalty
borne on Rajasthan fields becomes cost-recoverable and CIL bears the
burden. We are also skeptical about other regulatory issues bothering the
Cairn-Vedanta deal.
We do not see a major spurt in crude oil price in the near future, considering
global cues and high OPEC spare capacity. We assume crude oil to hover in range
of US $80–85/bl in the long term.
There are various exploratory upsides untapped in Barmer hills and other fields
waiting to be developed and commercialised. Further operational visibilities and
major finds in these fields could trigger our valuation upwards. Being highly
leveraged to crude oil price, any spurt in the same could act as an upside risk to
our valuation. Narrower discount of heavier crude over lighter ones than our
assumption of 10% could also be value-accretive. We have reserved these
scenarios as a potential upside with high probability.
We believe all the producing and developing fields of CIL have already been
priced in. Further triggers could be in the form of high potential discoveries in the
exploratory fields. However, it is too early to factor those in. We remain Neutral on
the stock with an SOTP-based fair value of `312.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India – 3QFY2011 Result Update
Angel Broking maintains a Neutral on Cairn India.
Cairn India (CIL) reported higher-than-expected net profit of `2,010cr for
3QFY2011, driven by better-than-expected operating profit on account of
marginally higher volumes and lower opex at Rajasthan fields. Further,
lower-than-expected interest cost and exploration expenses resulted in bottom line
coming in significantly above our estimates during the quarter. On account of fair
valuations, we maintain our Neutral view on the stock.
Mangala production drives growth: CIL reported a 525% yoy increase in
its top line to `3,096cr (`495cr) in 3QFY2011. Working interest production
during the quarter grew by 307.6% yoy, crossing the 100,000 mark, to
100,270boepd (24,599boepd) on account of production ramp up at the
Rajasthan fields. Gross production at the Mangala field stood at an average
124,861bpd in 3QFY2011 compared to 116,058bpd in 2QFY2011 and
15,430bpd in 3QFY2010. Current production from the field is hovering around
125,000bopd and is waiting for approval to ramp up to its potential of
150,000bpd. During the quarter, blended realisations registered an increase of
15.2% yoy to US $74.3/boe (US $64.5/boe). Average realisations of Mangala
crude stood at US $74.8/bbl (US $68.6/bbl in 2QFY2011) during 3QFY2011.
Outlook and valuation: We believe all the producing and developing fields of CIL
have already been priced in. Further triggers could be in the form of high
potential discoveries in the exploratory fields; however, it is too early to factor
those in. Going forward, we do not see a major spurt in crude oil price.
We remain Neutral on the stock with an SOTP-based fair value of `312.
Rajasthan crude production and higher realisations drive sales: During
3QFY2011, CIL’s top line increased by 525% yoy to `3,096cr (`495cr), which was
marginally higher than our expectation of `3,019cr. Growth was driven by higher
volumes and realisations on the back of higher sales from the Mangala field.
Working interest production during the quarter grew by 307.6% yoy to
100,270boepd (24,599boepd) on account of production ramp-up from the
Rajasthan field. Gross production at Rajasthan’s Mangala field stood at an
average 124,861bpd in 3QFY2011 compared to 116,058bpd in 2QFY2011 and
15,430bpd in 3QFY2010. Current production from the field is hovering around
125,000bopd and is waiting for approval to ramp up to its potential of
150,000bpd.
During the quarter, blended realisations registered an increase of 15.2% yoy to
US $74.3/boe (US $64.5/boe), led by higher contribution of crude oil in the
revenue mix on account of increased production from the Mangala field. Average
oil price realisations increased by 7.4% yoy to US $75.9/bbl (US $70.7/bbl),
whereas gas price realisations stood flat at US $4.5/mmbtu. Oil realisation from
the Mangala field stood at US $74.8/bbl, at a higher discount of around 13.5%
(10.6% in 2QFY2011) to Brent crude oil prices on account of widening spread
between the heavy and light fractions, though in line with management’s guidance
of 10–15% discount.
OPM expands by 2,293bp yoy and 394bp qoq: During 3QFY2011, total direct
operating expenses (opex) for Rajasthan crude stood at US $2.0/bbl
(US $1.9/bbl), which was lower than our expectation. Management has
maintained that opex will hover around US $3.5/bbl in the long term once
production at the Rajasthan field stabilises. Pipeline transportation costs stood at
US $0.7/bbl (US $0.5/bbl in 2QFY2011). However, the company continues to
guide for US $1.5/bbl as cost is bound to increase on account of pigging and
pipeline maintenance activity going ahead. OPM during the quarter expanded by
1,269bp yoy to 82.8% (70.1%) and exceeded our expectation due to lower direct
opex during the quarter. The increase in margin was also on account of higher
contribution of crude oil in the company’s revenue mix. Thus, EBITDA surged by
638.1% yoy to `2,563cr (`347cr) and was higher than our expectation as we had
expected higher work-over expenditure.
DD&A cost increases, exploration cost declines: DD&A expenditure increased by
857.8% yoy to `287cr (`30cr) during the quarter due to the increase in
depreciation cost on account of commissioning of the pipeline and the increase in
depletion cost on account of higher production from the Mangala field. Exploration
cost (includes costs pertaining to geological/geophysical studies, seismic studies,
other surveys and unsuccessful wells) fell by 51% to `22cr (`42cr) and `44cr in
3QFY2011 on account of fewer exploration activities undertaken, pending JV and
government approval.
Interest expenditure higher, other income declines yoy: Interest expenditure during
the quarter stood at `74cr as against `26cr in 3QFY2010 and `128cr in
2QFY2011. The increase could be attributed to capitalisation of debt related to
pipeline and newly commissioned fields. Other income declined by 65.8% yoy to
`34cr (`100cr). However, the same rose by 21.1% sequentially to `34cr (`28cr).
PAT increases 590.9%: Total tax during the quarter stood at `205cr as against
`56cr in 3QFY2010 and `148cr in 2QFY2011. Tax rate was higher on a qoq
basis at 9.2% as against 8.5% in 2QFY2011, as there was deferred tax reversal in
the previous quarter. Thus, robust top-line growth and OPM expansion aided by
lower-than-expected interest cost and exploration expenses during the quarter led
to a 590.9% yoy surge in PAT to `2,010cr (`291cr) during 3QFY2011, which was
above our expectation of `1,706cr.
Rajasthan development highlights
Till date, 125 development wells have been drilled in the Mangala field, out of
which 84 are completed – of which 55 wells are producing crude oil.
CIL has successfully drilled and completed 11 horizontal wells in the Mangala
field, and all have been put on production.
Development drilling and well-completion activities are progressing with three
drilling rigs and one completion rig operating in the Mangala development
area.
After the commissioning of Train-3 in June 2010 (leading to a processing
capacity of 1,30,000bpd), construction activities for Train-4 have commenced
(to take MPT crude processing capacity to 205,000bpd) and are on track for
delivery in 2HCY2011. The ~590km pipeline from Mangala to Salaya sold
11mn barrels of crude oil to private refiners and IOC.
Construction work on the ~80km Salaya to Bhogat section of the pipeline,
including the Bhogat terminal and marine facility, has commenced with
completion targeted for 2HCY2012.
During 15 months of operations, MPT has processed more than 27.5mnbbls
(11mnbbls in 3QFY2011 and 10.6mnbbls in 2QFY2011) crude from the
Mangala field, which has been sold to different domestic refiners such as IOC,
RIL and Essar Oil.
Management expects to reach the approved peak production of 1,75,000bpd
by the end of CY2011.
Mangala Enhanced Oil Recovery (EOR) pilot is on track; the water injection
phase of the pilot is underway.
Bhagyam development drilling has commenced; 14 wells have been drilled till
date and production is expected to commence in 2HCY2011 and achieve
approved plateau rate of 40,000bopd by the end of CY2011.
In Aishwariya field, assessment of higher production potential and design
optimisation is currently underway; the company plans to commence
production in 2HCY2012, subject to JV and government approval.
Investment arguments
Royalty issue – An overhang: CIL’s stock price is not moving in tandem with crude
oil prices on account of various regulatory constraints attached to the
Cairn-Vedanta deal, primarily being the royalty issue. ONGC, the JV partner of
CIL in Rajasthan field, has demanded the oil ministry for resolution of the royalty
issue before the materialisation of the deal. It has applied to the ministry for
considering royalty as a recoverable cost for the purpose of profit petroleum. On
fulfillment of this condition, CIL will have to bear its share of royalty burden. We
see a dip of `40/share in the valuation of CIL if royalty borne on Rajasthan fields
becomes cost-recoverable.
Producing fields priced in; exploratory upsides awaited: MBA fields seem to be
priced in the valuation as their reserve potential is known since CIL’s public issue.
However, there are various exploratory upsides untapped in Barmer hills and other
fields waiting to be developed and commercialised. Resolution of Cairn-Vedanta
issues could accelerate exploratory drillings in these fields, increasing the
probability of successful discoveries. Currently, various schemes related to
exploratory drillings and optimisation of producing fields are awaiting approvals
from the management and operating committee. Further operational visibilities in
such fields could trigger the valuations upwards.
Crude oil rally seems to be a temporary phenomenon: The Egyptian political
unrest fueled the rally in crude oil price in anticipation of disruption in supplies.
We believe it is a temporary phenomenon and do not see a major spurt in crude
oil price in the near future, considering global cues and high OPEC spare capacity.
We assume crude oil to hover in range of US $80–85/bl in the long term.
Heavy-light crude spread expected to narrow – An upside risk: The discount of
heavier crude over lighter ones is expected to narrow, as higher number of
complex refineries globally is increasing demand for tougher crude. Besides, crude
oil supply is expected to get lighter till 2012–13 due to higher incremental
production of NGLs and condensates (~3.5 mbpd), as stated in OPEC reports.
Heavier crude oil supply is also reducing, especially from Mexican Maya and many
OPEC countries. The combined effect results into reduction in spread between
heavy and light crude due to higher prices of heavier crude and lower lighter crude
prices. This can be an upside risk to our valuations since CIL sells tougher crude.
We have assumed 10% discount to lighter crude for estimating realisations for CIL.
Outlook and valuation
Earnings are expected to be even better in the coming quarters with Train-4 lined
up for production, subject to approvals from management and operating
committee. However, the stock price seems to have factored in these positives
much before due to the appropriate visibility of operational details of MBA fields.
We are concerned about the downside risks on account of resolution of the royalty
issue in favour of ONGC. We see a dip of `40/share in the valuation if royalty
borne on Rajasthan fields becomes cost-recoverable and CIL bears the
burden. We are also skeptical about other regulatory issues bothering the
Cairn-Vedanta deal.
We do not see a major spurt in crude oil price in the near future, considering
global cues and high OPEC spare capacity. We assume crude oil to hover in range
of US $80–85/bl in the long term.
There are various exploratory upsides untapped in Barmer hills and other fields
waiting to be developed and commercialised. Further operational visibilities and
major finds in these fields could trigger our valuation upwards. Being highly
leveraged to crude oil price, any spurt in the same could act as an upside risk to
our valuation. Narrower discount of heavier crude over lighter ones than our
assumption of 10% could also be value-accretive. We have reserved these
scenarios as a potential upside with high probability.
We believe all the producing and developing fields of CIL have already been
priced in. Further triggers could be in the form of high potential discoveries in the
exploratory fields. However, it is too early to factor those in. We remain Neutral on
the stock with an SOTP-based fair value of `312.
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