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UBS Investment Research
Cairn India Limited
Assessment of worst-case downside
�� Stock has not participated in the oil price rally
Cairn’s share price has broken its usual trend of moving with oil prices in this high
oil price environment as markets wait on further visibility on the Cairn-Vedanta
deal and other issues that require approval, namely: 1) royalty; 2) cess; and 3)
allowed peak production. We present a sensitivity analysis to assess the downside.
�� At our oil price assumption, best/worst-case valuation is Rs435/Rs346
A US$5/bbl increase in oil prices adds ~Rs30/share to our valuation. If royalty
were to become cost-recoverable, our valuation would decrease by ~Rs53/share; if
Cairn had to pay a cess of Rs2550/ton vs our current assumption of Rs927/ton,
then our valuation would decrease by Rs22/share. We assign some risk of
government approval by incorporating a lower peak production of 175kbopd (vs
210kbopd). A higher peak production adds Rs20/share to our valuation.
�� Permission to supply to RIL SEZ refinery precursor to higher production?
Production of 125 kbopd is dependent on off-take by the three current buyers—
IndianOil, Reliance Industries (DTA refinery) and Essar Oil. The production is
limited in case of a shutdown or maintenance at any of these facilities. It requires
export permission to sell crude to Reliance’s export-oriented refinery for which it
has applied, and we expect approval to come through. This will allow greater
flexibility for sale of crude.
�� Valuation: maintain Buy with a PT of Rs415 (22% upside potential)
Our sum-of-the-parts-based price target comprises: 1) DCF (WACC of 10.5%) for
producing fields at Rajasthan; 2) contingent reserves valued at EV/boe; 3)
exploratory upside—valued at EV/boe; and 4) other smaller producing fields.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Cairn India Limited
Assessment of worst-case downside
�� Stock has not participated in the oil price rally
Cairn’s share price has broken its usual trend of moving with oil prices in this high
oil price environment as markets wait on further visibility on the Cairn-Vedanta
deal and other issues that require approval, namely: 1) royalty; 2) cess; and 3)
allowed peak production. We present a sensitivity analysis to assess the downside.
�� At our oil price assumption, best/worst-case valuation is Rs435/Rs346
A US$5/bbl increase in oil prices adds ~Rs30/share to our valuation. If royalty
were to become cost-recoverable, our valuation would decrease by ~Rs53/share; if
Cairn had to pay a cess of Rs2550/ton vs our current assumption of Rs927/ton,
then our valuation would decrease by Rs22/share. We assign some risk of
government approval by incorporating a lower peak production of 175kbopd (vs
210kbopd). A higher peak production adds Rs20/share to our valuation.
�� Permission to supply to RIL SEZ refinery precursor to higher production?
Production of 125 kbopd is dependent on off-take by the three current buyers—
IndianOil, Reliance Industries (DTA refinery) and Essar Oil. The production is
limited in case of a shutdown or maintenance at any of these facilities. It requires
export permission to sell crude to Reliance’s export-oriented refinery for which it
has applied, and we expect approval to come through. This will allow greater
flexibility for sale of crude.
�� Valuation: maintain Buy with a PT of Rs415 (22% upside potential)
Our sum-of-the-parts-based price target comprises: 1) DCF (WACC of 10.5%) for
producing fields at Rajasthan; 2) contingent reserves valued at EV/boe; 3)
exploratory upside—valued at EV/boe; and 4) other smaller producing fields.
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