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Event: The Oil Minister Mr Jaipal Reddy in a press meet said that the Cabinet Committee on Economic Affairs (CCEA) has given conditional approval
to the Cairn Energy - Vedanta deal for purchase of majority shareholding in
Cairn India (CAIL). The key pre-conditions for approval of the deal are: i)
Royalty (20%) on crude production from Rajasthan block should be made
cost recoverable, ii) The ongoing arbitration between CAIL and the Government of India on payment of cess should be withdrawn, iii) No objection
certificate (NOC) from ONGC, CAIL's partner in Rajasthan block, should be
sought.
Outcome: Two key scenarios that emerge from this decision of CCEA are:
** Cairn Energy and/ or Vedanta does not accept these pre-conditions and
the deal is called off - This is the best possible outcome for CAIL's minority
shareholders as there would then be no adverse impact on CAIL's valuation.
However, the probability of this option working out is low considering the
recent modifications in the deal by Cairn Energy-Vedanta wherein the noncompete fee of INR50/share was done away with. This amount is close to
our estimate of INR65/sh reduction in CAIL's valuation if Rajasthan royalty
is made cost recoverable.
** Cairn Energy and Vedanta accept these pre-conditions - We believe that
if this happens, CAIL's Board of Directors will have to approve these conditions for them to be implemented. It is significant to note in this context
that CAIL's management has stated time and again that it will not accept
any condition as part of the deal that will be detrimental to CAIL's valuation.
CAIL Board's reluctance to accept cost recoverability of royalty will, therefore, be tested if Cairn Energy or Vedanta agrees to Government's preconditions for approval of the deal. If CAIL's Board also approves these preconditions, it would imply an 18% reduction in CAIL's valuation to INR360/
sh based on our long-term Brent crude forecast of US$125/bbl. Even after
factoring spot price of Brent at US$112/bbl and acceptance of these conditions by CAIL's Board, we estimate NAV for CAIL at INR325/sh.
Reiterate Buy as adverse impact of royalty and cess already priced in
At the current market price, we think the stock is already factoring in the
worst in terms of royalty sharing burden as well as higher cess payment.
We also expect CAIL to benefit from high crude oil prices and ramp-up in
Rajasthan production going ahead.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Event: The Oil Minister Mr Jaipal Reddy in a press meet said that the Cabinet Committee on Economic Affairs (CCEA) has given conditional approval
to the Cairn Energy - Vedanta deal for purchase of majority shareholding in
Cairn India (CAIL). The key pre-conditions for approval of the deal are: i)
Royalty (20%) on crude production from Rajasthan block should be made
cost recoverable, ii) The ongoing arbitration between CAIL and the Government of India on payment of cess should be withdrawn, iii) No objection
certificate (NOC) from ONGC, CAIL's partner in Rajasthan block, should be
sought.
Outcome: Two key scenarios that emerge from this decision of CCEA are:
** Cairn Energy and/ or Vedanta does not accept these pre-conditions and
the deal is called off - This is the best possible outcome for CAIL's minority
shareholders as there would then be no adverse impact on CAIL's valuation.
However, the probability of this option working out is low considering the
recent modifications in the deal by Cairn Energy-Vedanta wherein the noncompete fee of INR50/share was done away with. This amount is close to
our estimate of INR65/sh reduction in CAIL's valuation if Rajasthan royalty
is made cost recoverable.
** Cairn Energy and Vedanta accept these pre-conditions - We believe that
if this happens, CAIL's Board of Directors will have to approve these conditions for them to be implemented. It is significant to note in this context
that CAIL's management has stated time and again that it will not accept
any condition as part of the deal that will be detrimental to CAIL's valuation.
CAIL Board's reluctance to accept cost recoverability of royalty will, therefore, be tested if Cairn Energy or Vedanta agrees to Government's preconditions for approval of the deal. If CAIL's Board also approves these preconditions, it would imply an 18% reduction in CAIL's valuation to INR360/
sh based on our long-term Brent crude forecast of US$125/bbl. Even after
factoring spot price of Brent at US$112/bbl and acceptance of these conditions by CAIL's Board, we estimate NAV for CAIL at INR325/sh.
Reiterate Buy as adverse impact of royalty and cess already priced in
At the current market price, we think the stock is already factoring in the
worst in terms of royalty sharing burden as well as higher cess payment.
We also expect CAIL to benefit from high crude oil prices and ramp-up in
Rajasthan production going ahead.
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