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Cairn India
Knock-out!
Event
Cairn India (CAIR) reported a Q1FY12 PAT of Rs27.3bn (up 8.7x YoY) which
was in line with our estimates. CAIR parent Cairn Plc (CNE LN, Neutral, GBP
3.85, TP: GBP 4.35) has asked for a postal ballot of all shareholders to decide
(via a simple majority) the acceptance of Government of India’s (GoI) valueeroding
pre-conditions to Vedanta’s takeover. Cairn Plc and Vedanta group
hold ~80% of CAIR collectively; hence acceptance of the US$2bn royalty NPV
hit seems a formality as of now. As per management, ONGC’s approval and
Home Ministry security clearance to Vedanta shall be needed further to seal
the deal. We cut TP to Rs280 (from Rs297), and downgrade to Underperform.
Impact
Hit 20% tranche of profit share; royalty hit could be ~US$289mn for Q1:
CAIR paid US$42mn to GoI for the first time post cost-recovery of capex; as it
has now hit the 20% tranche of profit share. Management estimates the total
revenue impact till today if royalty is made cost-recoverable at US$289mn
additionally. On a run-rate basis, however, the impact is estimated at 15-16%
of revenues, or ~US$120mn at current production of 125kbpd & crude prices.
Producing at approved plateau of 125kbpd; further ramp-up stonewalled.
Mangala has been ready to ramp-up to 150kbpd for a year, pending approval
of the management committee. The petroleum ministry also has not approved
the Bhagyam field opex and development plans (to add 40kbpd by end-CY11)
despite a signed PSC; thus hindering Cairn India’s efforts to raise output to
175kbpd. Meanwhile, the Saraswati field started minor production of 250 bpd.
Mangala oil realizations up 12% QoQ; 11% discount to Brent maintained:
Rajasthan gross realizations rose to US$104.5/bbl. Rajasthan total opex fell to
US$2.5/bbl (US$3.3/bbl in Q4FY11), which is still significantly below the
company’s long-term steady-state estimate of US$5/bbl.
Earnings and target price revision
GoI has sided with ONGC (ONGC IN, Neutral, Rs277 : TP: Rs303), opining
that the 20% royalty and Rs2650/MT cess are cost-recoverable in the case of
the Rajasthan block, and hence must be shared proportionately by Cairn India
as well before it allows the Vedanta group takeover to go through. If agreed to
by CAIR shareholders, this could imply Rs49/sh downside due to the royalty.
We incorporate a risk-weighted impact of this into our TP, cutting it to Rs280.
Price catalyst
12-month price target: Rs280.00 based on a Sum of Parts methodology.
Catalyst: Postal ballot results; GoI permissions for ramp-up
Action and recommendation
The decision of accepting GoI preconditions is out of the CAIR board’s hands
now. If the deal does go through, apart from the erosion in value due to the
pre-conditions, the potential destabilising effect on the excellently-performing
existing CAIR management is an overhang. CAIR is trading at an expensive
US$52/bbl of EV/1P reserves (due to low 1P), vs global mean of US$18/bbl.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India
Knock-out!
Event
Cairn India (CAIR) reported a Q1FY12 PAT of Rs27.3bn (up 8.7x YoY) which
was in line with our estimates. CAIR parent Cairn Plc (CNE LN, Neutral, GBP
3.85, TP: GBP 4.35) has asked for a postal ballot of all shareholders to decide
(via a simple majority) the acceptance of Government of India’s (GoI) valueeroding
pre-conditions to Vedanta’s takeover. Cairn Plc and Vedanta group
hold ~80% of CAIR collectively; hence acceptance of the US$2bn royalty NPV
hit seems a formality as of now. As per management, ONGC’s approval and
Home Ministry security clearance to Vedanta shall be needed further to seal
the deal. We cut TP to Rs280 (from Rs297), and downgrade to Underperform.
Impact
Hit 20% tranche of profit share; royalty hit could be ~US$289mn for Q1:
CAIR paid US$42mn to GoI for the first time post cost-recovery of capex; as it
has now hit the 20% tranche of profit share. Management estimates the total
revenue impact till today if royalty is made cost-recoverable at US$289mn
additionally. On a run-rate basis, however, the impact is estimated at 15-16%
of revenues, or ~US$120mn at current production of 125kbpd & crude prices.
Producing at approved plateau of 125kbpd; further ramp-up stonewalled.
Mangala has been ready to ramp-up to 150kbpd for a year, pending approval
of the management committee. The petroleum ministry also has not approved
the Bhagyam field opex and development plans (to add 40kbpd by end-CY11)
despite a signed PSC; thus hindering Cairn India’s efforts to raise output to
175kbpd. Meanwhile, the Saraswati field started minor production of 250 bpd.
Mangala oil realizations up 12% QoQ; 11% discount to Brent maintained:
Rajasthan gross realizations rose to US$104.5/bbl. Rajasthan total opex fell to
US$2.5/bbl (US$3.3/bbl in Q4FY11), which is still significantly below the
company’s long-term steady-state estimate of US$5/bbl.
Earnings and target price revision
GoI has sided with ONGC (ONGC IN, Neutral, Rs277 : TP: Rs303), opining
that the 20% royalty and Rs2650/MT cess are cost-recoverable in the case of
the Rajasthan block, and hence must be shared proportionately by Cairn India
as well before it allows the Vedanta group takeover to go through. If agreed to
by CAIR shareholders, this could imply Rs49/sh downside due to the royalty.
We incorporate a risk-weighted impact of this into our TP, cutting it to Rs280.
Price catalyst
12-month price target: Rs280.00 based on a Sum of Parts methodology.
Catalyst: Postal ballot results; GoI permissions for ramp-up
Action and recommendation
The decision of accepting GoI preconditions is out of the CAIR board’s hands
now. If the deal does go through, apart from the erosion in value due to the
pre-conditions, the potential destabilising effect on the excellently-performing
existing CAIR management is an overhang. CAIR is trading at an expensive
US$52/bbl of EV/1P reserves (due to low 1P), vs global mean of US$18/bbl.
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