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UBS Investment Research
Cairn India Limited
P ricing in US$65/bbl Brent
Event: Cairn India stock has fallen 10% over the past week
Over the past week, Brent has fallen 10.28% to US$103.46 and Cairn India has
followed suit, falling 10.29% in the same period. We see this as a good buying
opportunity.
Impact: at current valuations the stock prices in US$65/bbl crude
Our price target incorporates the effect of a higher cess payment (Rs2550/ton),
reflects cost recoverable royalty and a peak production of 210 kbopd from FY13
onwards. Under these assumptions the current stock price implies a Brent price of
US$65/bbl, versus UBS’s long-term price forecast of US$95/bbl for FY13 and
beyond. At long-term crude of US$75/bbl we estimate Cairn’s valuation would be
Rs315/share, while at long-term crude of US$85/bbl the valuation would be
Rs352/share.
Action: reiterate Buy rating
We believe the stock is now trading at an attractive valuation. As the deal gets
closer to consummation, we believe management and the market’s focus will revert
to operational issues. We expect that the company will be able to achieve 210 bopd
production by March 2012 as we expect JV and regulatory support once Cairn
accepts the cess and royalty conditions of the government. Success in EOR should
provide further upside and production ramp-up to 240 bopd, in our view.
Valuation: SOTP-based price target of Rs385
Our sum-of-the-parts-based price target comprises: 1) DCF (WACC 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.
Cairn India Limited
Cairn India is a subsidiary of Cairn Energy PLC, a UK-based crude oil and
natural gas E&P company. Cairn India owns 11 oil and gas blocks that include
producing, development and exploration assets. Rajasthan block RJ-ON-90/1, in
which it has a 70% stake contributes a significant proportion of Cairn India's
total production. In August 2010, the Vedanta Group made a bid to buy
management control of Cairn India by buying Cairn Energy's stake in the
company. The Vedanta Group is waiting for government approval.
Statement of Risk
Oil price and regulation are the major risks to the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Cairn India Limited
P ricing in US$65/bbl Brent
Event: Cairn India stock has fallen 10% over the past week
Over the past week, Brent has fallen 10.28% to US$103.46 and Cairn India has
followed suit, falling 10.29% in the same period. We see this as a good buying
opportunity.
Impact: at current valuations the stock prices in US$65/bbl crude
Our price target incorporates the effect of a higher cess payment (Rs2550/ton),
reflects cost recoverable royalty and a peak production of 210 kbopd from FY13
onwards. Under these assumptions the current stock price implies a Brent price of
US$65/bbl, versus UBS’s long-term price forecast of US$95/bbl for FY13 and
beyond. At long-term crude of US$75/bbl we estimate Cairn’s valuation would be
Rs315/share, while at long-term crude of US$85/bbl the valuation would be
Rs352/share.
Action: reiterate Buy rating
We believe the stock is now trading at an attractive valuation. As the deal gets
closer to consummation, we believe management and the market’s focus will revert
to operational issues. We expect that the company will be able to achieve 210 bopd
production by March 2012 as we expect JV and regulatory support once Cairn
accepts the cess and royalty conditions of the government. Success in EOR should
provide further upside and production ramp-up to 240 bopd, in our view.
Valuation: SOTP-based price target of Rs385
Our sum-of-the-parts-based price target comprises: 1) DCF (WACC 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.
Cairn India Limited
Cairn India is a subsidiary of Cairn Energy PLC, a UK-based crude oil and
natural gas E&P company. Cairn India owns 11 oil and gas blocks that include
producing, development and exploration assets. Rajasthan block RJ-ON-90/1, in
which it has a 70% stake contributes a significant proportion of Cairn India's
total production. In August 2010, the Vedanta Group made a bid to buy
management control of Cairn India by buying Cairn Energy's stake in the
company. The Vedanta Group is waiting for government approval.
Statement of Risk
Oil price and regulation are the major risks to the company.
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