Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Ltd.
Royalty issue overshadows
F1Q12 results
Quick Comment: Cairn reported its F1Q12 results, and
had a conference call in which management suggested
that the Board has decided to hold a postal ballot of all
the shareholders to decide on the acceptance of
pre-conditions related to approval of the Cairn-Vedanta
deal. The most important pre-condition is the issue of
royalty to be made cost recoverable. Management
highlighted that Cairn Energy (~52% owner of Cairn
India), being a majority shareholder, requested that an
EGM of the company be convened to decide on these
conditions. Management expects to complete the
process of EGM and postal ballot in next 40-50 days.
Majority voting rights are now with Cairn Energy
and Vedanta: The postal ballot outcome remains to be
seen, but we highlight that as per the results press
release, Cairn Energy and Vedanta together now hold
80.6% of the voting rights in Cairn India.
If royalty is made cost recoverable, our target price
would be Rs371, Rs58 (13%) lower: That still implies
13% upside. In this adverse case, we see earnings
downside of ~18% for F2012e and ~19% for F2013e.
Potential impact on F1Q12: Cairn highlighted that
adjusting for royalty which included impact of earlier
years, F1Q12 profits would have been US$289mn lower
(~47%). However, the recurring impact is expected to be
15-16% of revenues, implying earnings impact of ~20%.
F1Q12 - operationally in line: Cairn India reported
F1Q12 results with EBITDA at Rs31.7bn, up 1% QoQ.
Rajasthan crude oil realisation was at US$104.5/bbl,
reflecting an 11% discount to Brent. Reported PAT was
in line with our expectation at Rs27.3bn, up 11% QoQ.
Strong cash-flow generation: Cairn generated cash
flow from operation to the tune of ~US$576mn (+433%
YoY, +1% QoQ). At the end of F1Q12, the company’s
net cash position of US$1bn implied cash per share of
Rs24/share, about 7% of the current share price.
F1Q12 Results – Additional Details
Cairn reported EBITDA of Rs31.7bn, up 391% YoY and 1%
QoQ. PAT of Rs27.3bn was up 869% YoY and11% QoQ.
Cairn also highlighted that it has started paying profit petroleum
on its Rajasthan field; that was Rs1.9bn for this quarter.
Rajasthan opex still remains low: Opex for the quarter was
$3.5/bbl, out of which US$2.2/bbl was for upstream and
US$1.3/bbl for pipeline. However, management has reiterated
its guidance of normalized opex of US$5/bbl (including
pipeline) for Rajasthan fields, in line with our assumptions.
Tax rate guidance lowered: The effective tax rate for the
quarter was 3.2%, mainly due to lower capitalization of
exploration and development costs, which resulted in lower
deferred tax rate liability.
Oil and Gas production: Oil production from Mangala field in
Rajasthan averaged 125,127 bpd, up 5.9% QoQ as production
uptime was closer to 100% levels, whereas last quarter was
affected by a pipeline-related shutdown. Sales volumes were
maintained at 125,000bpd
Oil production from Ravva averaged ~30.5 kbpd, up ~19%
QoQ and ~5.6% on a YoY basis. Production from Cambay
(CB/OS-2) averaged ~5.6kbpd, down 12% QoQ and 32%
YoY.
Gas production from Ravva was at 44 mmcfd, down 21% QoQ
and 10% on a YoY basis. Gas production from Cambay fields
was at 20mmscfd, down 9% QoQ and 38% YoY. Both the fields
are mature and currently are in a natural decline.
Bhagyam to start production from CY-4Q11: Cairn has
maintained its guidance of starting the Bhagyam production
from the Oct-Dec quarter, as the project is progressing well.
However, it has highlighted that this remains subject to
regulatory approvals. It also highlighted that the regulatory
environment remains challenging; however, it is hopeful of
improvement in coming months. Cairn maintained that it can
ramp up Bhagyam production to its plateau rate of 40kb/d
within two months of approvals.
Rajasthan oil price realization for the quarter was at
$104.5/bbl: That was an 11% discount to the Brent price for
the quarter, vs. 12% during the last quarter. Management has
reiterated its guidance of a 10-15% discount to Brent, which
could be on the higher side of the range if the Light-Heavy
spread differential widens. For Rajasthan crude, we continue
to model a 12.5% discount to Brent price.
Sri Lanka exploration to start in 2H: On the exploration front,
drilling in the Sri Lanka block is set to commence in August
2011. A drillship has been contracted and logistical
preparations and detailed studies are ongoing ahead of drilling
Cairn India: Valuation Based on Net Asset Value
To derive our base, bear and bull case scenario values for
Cairn India, we use an NAV valuation based on sum-of-parts
and DCF for individual fields. We then add the NAV of the total
resources to NAV of reserves to arrive at the base case
valuation.
Reserves: We use a DCF methodology to assess the cash
flow of individual fields owned by Cairn India based on its 2P
reserves. For our base case, we use an 11% cost of capital for
the life of the fields and a beta of 0.82x (Exhibit 11). We
calculate EV-based NAV at ~US$15.7bn. We use long-term oil
price assumption of US$90/bbl.
We estimate Rajasthan Core NAV to be at US$10.3bn
(Rs240/share) excluding EOR potential, which we estimate is
another US$2.3bn (Rs53/share) assuming it adds 30kb/d to
overall production taking plateau to 240kb/d and increasing
reserve life to ~12 years. Overall, we estimate Rajasthan NAV
to be at Rs293/share including the EOR production. We value
NAV for Ravva and Gauri at US$115mn, or Rs7.1/share.
Resources: We value the company’s contingent resources on
the basis of the imputed NAV/boe (US$/boe) based on our
level of conviction. For the Rajasthan other fields and
Rajasthan Exploration upside and KG Basin resources, we
have used EV/BOE of US$9.7/bbl as we await more clarity
from the company on the field exploration and development
plan. Based on this, we compute a value of US$3bn
(Rs62/share) for these resources.
Net Cash: We estimate the company to end F2012e year with
net cash of US$2.6bn including the dividend payout
(Rs62/share) which we add to our NAV. Overall, we arrive at a
net asset value of US$18.3bn, which equates to Rs429/share.
Risks to Price Target
• Crude volatility: Global crude prices are cyclical and
volatile, so Cairn’s earnings, too, may correlate with sector
cyclicality.
• Price of Rajasthan crude: Could be limited by its viscous
nature, which would lower realizations relative to Brent.
• Delay in Government Approvals: Production ramp-up
could be delayed, if government approvals don’t come
through as expected.
• Royalty to be made cost recoverable: If royalty is made
cost recoverable, our price target will be lowered by
~Rs58/share.
Morgan Stanley & Co. Limited is acting as financial adviser and
sponsor to Vedanta Resources PLC (“Vedanta”) on Vedanta
Group's proposed acquisition of 51% to 60% of Cairn India
Limited ("Cairn India"), as announced on 16 August 2010.
Morgan Stanley & Co. International plc. is also Corporate
Broker to Vedanta.
This report was prepared solely upon information generally
available to the public. No representation is made that it is
accurate and complete. This report is not a recommendation or
an offer to buy or sell the securities mentioned. Please refer to
the notes at the end of this report.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Ltd.
Royalty issue overshadows
F1Q12 results
Quick Comment: Cairn reported its F1Q12 results, and
had a conference call in which management suggested
that the Board has decided to hold a postal ballot of all
the shareholders to decide on the acceptance of
pre-conditions related to approval of the Cairn-Vedanta
deal. The most important pre-condition is the issue of
royalty to be made cost recoverable. Management
highlighted that Cairn Energy (~52% owner of Cairn
India), being a majority shareholder, requested that an
EGM of the company be convened to decide on these
conditions. Management expects to complete the
process of EGM and postal ballot in next 40-50 days.
Majority voting rights are now with Cairn Energy
and Vedanta: The postal ballot outcome remains to be
seen, but we highlight that as per the results press
release, Cairn Energy and Vedanta together now hold
80.6% of the voting rights in Cairn India.
If royalty is made cost recoverable, our target price
would be Rs371, Rs58 (13%) lower: That still implies
13% upside. In this adverse case, we see earnings
downside of ~18% for F2012e and ~19% for F2013e.
Potential impact on F1Q12: Cairn highlighted that
adjusting for royalty which included impact of earlier
years, F1Q12 profits would have been US$289mn lower
(~47%). However, the recurring impact is expected to be
15-16% of revenues, implying earnings impact of ~20%.
F1Q12 - operationally in line: Cairn India reported
F1Q12 results with EBITDA at Rs31.7bn, up 1% QoQ.
Rajasthan crude oil realisation was at US$104.5/bbl,
reflecting an 11% discount to Brent. Reported PAT was
in line with our expectation at Rs27.3bn, up 11% QoQ.
Strong cash-flow generation: Cairn generated cash
flow from operation to the tune of ~US$576mn (+433%
YoY, +1% QoQ). At the end of F1Q12, the company’s
net cash position of US$1bn implied cash per share of
Rs24/share, about 7% of the current share price.
F1Q12 Results – Additional Details
Cairn reported EBITDA of Rs31.7bn, up 391% YoY and 1%
QoQ. PAT of Rs27.3bn was up 869% YoY and11% QoQ.
Cairn also highlighted that it has started paying profit petroleum
on its Rajasthan field; that was Rs1.9bn for this quarter.
Rajasthan opex still remains low: Opex for the quarter was
$3.5/bbl, out of which US$2.2/bbl was for upstream and
US$1.3/bbl for pipeline. However, management has reiterated
its guidance of normalized opex of US$5/bbl (including
pipeline) for Rajasthan fields, in line with our assumptions.
Tax rate guidance lowered: The effective tax rate for the
quarter was 3.2%, mainly due to lower capitalization of
exploration and development costs, which resulted in lower
deferred tax rate liability.
Oil and Gas production: Oil production from Mangala field in
Rajasthan averaged 125,127 bpd, up 5.9% QoQ as production
uptime was closer to 100% levels, whereas last quarter was
affected by a pipeline-related shutdown. Sales volumes were
maintained at 125,000bpd
Oil production from Ravva averaged ~30.5 kbpd, up ~19%
QoQ and ~5.6% on a YoY basis. Production from Cambay
(CB/OS-2) averaged ~5.6kbpd, down 12% QoQ and 32%
YoY.
Gas production from Ravva was at 44 mmcfd, down 21% QoQ
and 10% on a YoY basis. Gas production from Cambay fields
was at 20mmscfd, down 9% QoQ and 38% YoY. Both the fields
are mature and currently are in a natural decline.
Bhagyam to start production from CY-4Q11: Cairn has
maintained its guidance of starting the Bhagyam production
from the Oct-Dec quarter, as the project is progressing well.
However, it has highlighted that this remains subject to
regulatory approvals. It also highlighted that the regulatory
environment remains challenging; however, it is hopeful of
improvement in coming months. Cairn maintained that it can
ramp up Bhagyam production to its plateau rate of 40kb/d
within two months of approvals.
Rajasthan oil price realization for the quarter was at
$104.5/bbl: That was an 11% discount to the Brent price for
the quarter, vs. 12% during the last quarter. Management has
reiterated its guidance of a 10-15% discount to Brent, which
could be on the higher side of the range if the Light-Heavy
spread differential widens. For Rajasthan crude, we continue
to model a 12.5% discount to Brent price.
Sri Lanka exploration to start in 2H: On the exploration front,
drilling in the Sri Lanka block is set to commence in August
2011. A drillship has been contracted and logistical
preparations and detailed studies are ongoing ahead of drilling
Cairn India: Valuation Based on Net Asset Value
To derive our base, bear and bull case scenario values for
Cairn India, we use an NAV valuation based on sum-of-parts
and DCF for individual fields. We then add the NAV of the total
resources to NAV of reserves to arrive at the base case
valuation.
Reserves: We use a DCF methodology to assess the cash
flow of individual fields owned by Cairn India based on its 2P
reserves. For our base case, we use an 11% cost of capital for
the life of the fields and a beta of 0.82x (Exhibit 11). We
calculate EV-based NAV at ~US$15.7bn. We use long-term oil
price assumption of US$90/bbl.
We estimate Rajasthan Core NAV to be at US$10.3bn
(Rs240/share) excluding EOR potential, which we estimate is
another US$2.3bn (Rs53/share) assuming it adds 30kb/d to
overall production taking plateau to 240kb/d and increasing
reserve life to ~12 years. Overall, we estimate Rajasthan NAV
to be at Rs293/share including the EOR production. We value
NAV for Ravva and Gauri at US$115mn, or Rs7.1/share.
Resources: We value the company’s contingent resources on
the basis of the imputed NAV/boe (US$/boe) based on our
level of conviction. For the Rajasthan other fields and
Rajasthan Exploration upside and KG Basin resources, we
have used EV/BOE of US$9.7/bbl as we await more clarity
from the company on the field exploration and development
plan. Based on this, we compute a value of US$3bn
(Rs62/share) for these resources.
Net Cash: We estimate the company to end F2012e year with
net cash of US$2.6bn including the dividend payout
(Rs62/share) which we add to our NAV. Overall, we arrive at a
net asset value of US$18.3bn, which equates to Rs429/share.
Risks to Price Target
• Crude volatility: Global crude prices are cyclical and
volatile, so Cairn’s earnings, too, may correlate with sector
cyclicality.
• Price of Rajasthan crude: Could be limited by its viscous
nature, which would lower realizations relative to Brent.
• Delay in Government Approvals: Production ramp-up
could be delayed, if government approvals don’t come
through as expected.
• Royalty to be made cost recoverable: If royalty is made
cost recoverable, our price target will be lowered by
~Rs58/share.
Morgan Stanley & Co. Limited is acting as financial adviser and
sponsor to Vedanta Resources PLC (“Vedanta”) on Vedanta
Group's proposed acquisition of 51% to 60% of Cairn India
Limited ("Cairn India"), as announced on 16 August 2010.
Morgan Stanley & Co. International plc. is also Corporate
Broker to Vedanta.
This report was prepared solely upon information generally
available to the public. No representation is made that it is
accurate and complete. This report is not a recommendation or
an offer to buy or sell the securities mentioned. Please refer to
the notes at the end of this report.
No comments:
Post a Comment