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Cairn India – crude price cut
Deal issues stifling all progress
Event
The Macquarie global oil team has lowered its near-term Brent crude
forecasts by 3% (see figure below) due to the IEA’s recent action of releasing
oil inventory equivalent to 2mbpd for 60 days in the market; however, the
longer-term forecast has been maintained. As the only pure oil-leveraged
stock in India (and arguably in Asia), Cairn India is the lone company within
the Indian space to be significantly affected. We cut our estimate of Cairn
India’s FY12 PAT by 5%, lower our TP to Rs 297/sh from Rs 300/sh and
maintain our Neutral rating.
Impact
The Government of India has sided with ONGC (ONGC IN, Rs278, Neutral,
TP: Rs303) and opined that royalty and cess are cost-recoverable in the case
of the Rajasthan block, and hence must be shared proportionately by Cairn
India before the government will allow the Vedanta group takeover to go
through. If agreed to by Cairn India, this could imply an additional Rs65/sh
downside. According to media reports, the oil ministry, in a recent meeting, also
did not approve the Bhagyam field capex and development plans (to add
40kbpd), thus stonewalling Cairn India’s efforts to raise output to 175kbpd by
end-CY10.
Earnings and target price revision
FY12E PAT cut by 5%; TP cut by 1% to Rs297.
Price catalyst
12-month price target: Rs297.00 based on a DCF methodology.
Catalyst: Decision by Cairn India board on royalty/cess pre-condition.
Action and recommendation
Stock struck by deal overhang; deal hangover could be negative too: We
believe the deal continues to be an overhang either way for Cairn India, as even
if it goes through without Cairn having to accept the pre-conditions, a possible
destabilisation of management and Vedanta’s lack of experience in the sector
could erode value in what has so far been a story of operational excellence.
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India – crude price cut
Deal issues stifling all progress
Event
The Macquarie global oil team has lowered its near-term Brent crude
forecasts by 3% (see figure below) due to the IEA’s recent action of releasing
oil inventory equivalent to 2mbpd for 60 days in the market; however, the
longer-term forecast has been maintained. As the only pure oil-leveraged
stock in India (and arguably in Asia), Cairn India is the lone company within
the Indian space to be significantly affected. We cut our estimate of Cairn
India’s FY12 PAT by 5%, lower our TP to Rs 297/sh from Rs 300/sh and
maintain our Neutral rating.
Impact
The Government of India has sided with ONGC (ONGC IN, Rs278, Neutral,
TP: Rs303) and opined that royalty and cess are cost-recoverable in the case
of the Rajasthan block, and hence must be shared proportionately by Cairn
India before the government will allow the Vedanta group takeover to go
through. If agreed to by Cairn India, this could imply an additional Rs65/sh
downside. According to media reports, the oil ministry, in a recent meeting, also
did not approve the Bhagyam field capex and development plans (to add
40kbpd), thus stonewalling Cairn India’s efforts to raise output to 175kbpd by
end-CY10.
Earnings and target price revision
FY12E PAT cut by 5%; TP cut by 1% to Rs297.
Price catalyst
12-month price target: Rs297.00 based on a DCF methodology.
Catalyst: Decision by Cairn India board on royalty/cess pre-condition.
Action and recommendation
Stock struck by deal overhang; deal hangover could be negative too: We
believe the deal continues to be an overhang either way for Cairn India, as even
if it goes through without Cairn having to accept the pre-conditions, a possible
destabilisation of management and Vedanta’s lack of experience in the sector
could erode value in what has so far been a story of operational excellence.
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